The March 31 deadline for making tax-saving investments is just a couple of days away and taxpayers are looking at some popular small saving schemes that offer deductions under section 80C.
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The list of such schemes includes Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA), National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS) and five-year post office time deposits.
While these schemes offer high interest rates and secure returns, bear in mind that the interest rates are subject to review every quarter, and tax benefits of up to Rs 1.5 lakh under section 80C are available to those who choose the old tax regime. Given that these instruments come with lock-in periods of over five years, you should invest only if liquidity needs are not likely to arise in the near future.
Ensure that you are not investing in these instruments only for the tax benefits, but because they fit well into your overall financial planning strategy.
Here are the key features, restrictions and tax benefits that they offer.
Public Provident Fund (PPF)
A favourite with salaried and self-employed alike, this popular avenue offers an interest rate of 7.1 percent, which is subject to quarterly reviews by the finance ministry. You can start with a minimum investment of Rs 500 in a financial year, with Rs 1.5 lakh being the cap.
It comes with a long maturity period of 15 years (excluding the financial year of account opening), though premature withdrawals are allowed. It can be extended for a period of five years once it nears maturity.
You can make one withdrawal during a financial year after five years, not including the year of account opening. For example, if you opened your account in the year 2017-18, you can make one withdrawal in the year 2023-24.
The maximum premature withdrawal permitted is 50 percent of the balance at the end of the fourth preceding financial year or at the end of the preceding year, whichever is lower.
Sukanya Samriddhi Account (SSA)
At 8.2 percent per annum, this scheme carries the highest interest rate, compounded yearly, amongst small savings instruments. You can start investing with as little as Rs 250, but the upper limit is Rs 1.5 lakh. The interest earned is also tax-free.
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A guardian of a girl child below the age of ten years can open this account to save for her education. He or she can continue making the deposit for the subsequent 15 years.
However, it will mature only after the girl child turns 21; the proceeds can also be completely withdrawn if the girl were to get married after turning 18. Such withdrawals can be made at the time of the wedding – these will not be permitted one month prior to and three months after the girl gets married. The rules, though, allow partial, premature withdrawal of up to 50 percent of the balance at the end of the preceding financial year, once the girl turns 18 or passes her tenth standard examinations.
National Savings Certificate (NSC) – VIII issue
Now less popular compared to earlier, these instruments come with a five-year tenure. The minimum deposit amount is Rs 1,000. At present, they offer an interest rate of 7.7 percent, compounded annually but paid at maturity. Premature closure is not permitted, except in a few cases such as death of the account holders, forfeiture by a pledgee (a gazetted officer) and order by a court.
You can pledge or transfer your NSC as security, by submitting an application form for the purpose at your local post office. It has to be accompanied by an acceptance letter from the pledgee.
Senior Citizens Savings Scheme (SCSS)
Individuals over the age of 60 years can invest in this scheme, which comes with a lock-in period of five years. The minimum deposit is Rs 1,000, while the maximum amount is Rs 30 lakh. These deposits qualify for deductions up to the overall limit of Rs 1.5 lakh under section 80C.
That is, if you have chosen the old tax regime. Currently, the rate of interest offered on this instrument is 8.2 percent per annum, payable every quarter (April 1, July 1, October 1 and January 1). In the case of premature closure, the depositors stand to lose 1-1.5 percent of the principal amount.
Five-year time deposits
The national savings time deposits come with one, two, three and five-year tenures. It’s the five-year time deposit that is eligible for deductions under section 80C.
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The minimum deposit required is Rs 1,000. Currently, it offers an interest rate of 7.5 percent. In the case of premature closure, the interest rate will be 2 percentage points less than the rate applicable to the tenure.
