Post Office Savings Schemes

Introduction

With the recent volatility in the equity markets, investors are looking for stable and steady financial instruments. Many investors view traditional products as safe investments that act as a safety net against market uncertainty.

Post Office Saving Scheme is one such investment alternative that provides capital protection and reasonable returns.  

In India, the Post Office is one of the oldest organisations that started during the British Era. Established in 1854, post offices primarily focus on mail delivery. Over the years, the post office ventured into various services, including financial services such as banking, insurance, and investment services. Currently, post office investment services are widely popular.

Post Office Investments Services consist of various saving schemes. These schemes provide a high rate of return and tax benefits. Moreover, these schemes are virtually risk-free since they hold the sovereign guarantee of the Indian Government. This blog discusses the different post office savings schemes, the interest rates, key characteristics, advantages, etc.
 

9 Post Office Saving Schemes | Best Post Office Scheme | Post Office Saving Schemes (हिंदी में)

Post Office Saving Schemes Types and Benefits

The Post Office offers various types of investment schemes to investors. Each scheme differs in terms of the rate of return, eligibility, minimum and maximum investment, etc. The government endeavours to cater to every type of investor with customisation for each scheme.

Below are details of schemes offered by the Post Office –

Post Office schemes

1.    Post Office Savings Account

The post office savings account is like a savings bank account. This post office savings scheme is applicable throughout India and is especially popular in rural areas. An individual can open only one with one post office but may transfer the account from one post office to another.

The post office savings account earns interest fixed on the deposit amount. Therefore, it is suitable for risk-averse individuals intending to earn a fixed investment return. You can open a savings account in the post office for as low as Rs. 20. Under the non-cheque facility, the minimum balance is Rs. 50. Depositors can withdraw the deposits at their convenience.

The Central Government determines the post office savings account's interest rate in line with the savings bank account's interest rate. The post office saving account currently offers an interest rate of 4% per annum and is subject to tax. However, TDS does not apply to interest earned from post office savings accounts. A deduction of Rs. 10,000 per annum is available under Section 80TTA of the Income Tax Act, 1961, on the total savings account interest, including post office savings interest. 

2.    Post Office Recurring Deposit Account (RD)

The Post Office Recurring Deposit is a monthly investment for five years, i.e., 60 monthly instalments. Post Office RD allows you to save through regular monthly deposits. Post Account RD enables small-scale investors to invest a meagre amount of Rs.100 per month or more. The minimum amount is in multiples of Rs.10, without any upper limit for the investment. 

This scheme's interest rates are 5.8% per annum, compounded quarterly. Income is taxable in the hands of investors based on the individual tax slab rates, but it does not attract any TDS. The RD account is subject to a minimum lock-in period of three months. You cannot prematurely withdraw the post office RD investments. For emergencies, you can break the RD with a penalty of Rs. 1 for every Rs. 100 invested.

Indian residents above 18 years old can open an account with the post office, and parents or guardians may open an account on behalf of minor children. Two adult individuals may choose to open a joint account. Individuals may open multiple accounts and transfer the deposit from one post office to another.

3.    Post Office Time Deposit Account (TD)

This account is similar to a fixed deposit with a bank. It is a popular post office savings scheme since it offers different tenures for investment – one, two, three or five years. The Finance Ministry determines the interest rate every quarter based on the yield of government securities.

The minimum investment amount in POTD is Rs. 1000. You may opt for reinvestment of the interest or choose to redirect the interest to a five-year recurring deposit scheme. You can also transfer the deposit from one post office to another. Upon maturity, if you choose not to withdraw the TD, then the Post Office automatically reinvests the amount for the initial tenure of the deposit at the new applicable interest rates. POTD investment qualifies for the deduction under Section 80C of The Income Tax Act, 1961.

4.    Post Office Monthly Income Scheme Account (MIS)

POMIS is a unique investment scheme that guarantees fixed monthly interest payments on lump sum investments. The monthly income scheme has a lock-in period of five years after which the depositor may withdraw or reinvest the entire amount into the scheme. Currently, the interest rate in the post office MIS is 6.7% per annum, payable monthly. Interest earned is subject to tax but not TDS.

For example, you invest Rs. 2 Lakh in POMIS. You will earn Rs. 1068 every month for five years. At the end of five years, you may withdraw Rs. 2 Lakhs or choose to reinvest it.

A resident individual can open an MIS account in either a single or a joint holding pattern. A minor can also invest in this scheme. The minimum investment for POMIS is Rs. 1500, and the maximum limit is Rs. 4.50 Lakhs per individual and Rs. 9 Lakhs for joint accounts.

Also, you can transfer the POMIS account from one post office to another. POMIS offers flexibility and allows you to withdraw the investment if required. However, it may be subject to some penalties.

5.    Senior Citizen Savings Scheme (SCSS)

Senior Citizens Savings Scheme (SCSS) is similar to a fixed deposit for senior citizens. The current interest rate is 7.6% per annum with a maturity of five years. Investors have the option to extend the scheme duration for another three years. An investor may hold multiple accounts individually or jointly with a spouse.

The minimum investment amount is Rs. 1,000 with a maximum limit of Rs. 15 Lakhs. Investments in SCSS are eligible for tax exemption under Section 80C. Interest income is taxable, and TDS is applicable if the interest is more than Rs. 50,000. Also, SCSS allows transfer from one post office to another. Investors may withdraw the investment before maturity at a penalty.

6.    Public Provident Fund Account (PPF)

The National Savings Institute launched PPF in 1968. A Public Provident Fund is a long-term investment avenue with a maturity of fifteen years. Currently, the interest rate is 7.1% per annum. While PPF pays annual interest on March 31, the interest calculation is monthly. Investment in PPF is eligible for deduction under Section 80C of the Income Tax Act, 1961. Interest earned and maturity amount are not subject to income tax.

In addition to tax efficiency, PPF offers partial withdrawal of investments. You can withdraw up to 50% of the preceding year's balance at the end of five years. You can also choose premature closure of the PPF account with a penalty of 1%.

7.    National Savings Certificates (NSC)

National Savings Certificate (NSC) promotes savings among low-income and mid-income groups. This fixed-income savings scheme fetches interest at 6.80% per annum, compounded semi-annually. The interest is subject to automatic reinvestment, and you will receive the investment and interest upon maturity.

NSC have a fixed lock-in period of five years. You cannot withdraw NSC investment prematurely except in case of the investor's death. The minimum investment is Rs. 100, with no maximum limit on investment. Only Resident individuals can invest in National Savings Certificates. Trusts, HUFs, and NRIs cannot invest in NSC.

8.    Sukanya Samriddhi Accounts (SSA)

In 2015, the post office launched Sukanya Samriddhi Accounts to promote girl-child education. The minimum investment is Rs. 250, and the maximum is Rs. 1.50 Lakhs per annum. Currently, it offers an attractive rate of 6.9% per annum, compounded annually.

Only resident Indians are eligible for investment. Parents or guardians of a girl child may invest in the scheme on behalf of the girl before 10, and it matures when the girl turns the age of twenty-one. The scheme does not allow premature withdrawals unless the girl dies or is fighting a life-threatening disease. Once the girl child turns 18, the investor may withdraw funds for higher education.

Investment in SSA is eligible for deduction under section 80C to Rs. 1.50 Lakhs per annum. Also, interest earned and maturity amount are exempt from tax. An investor cannot open multiple accounts in the name of one girl child. A parent or guardian can open a maximum of two accounts in the name of two different girl children. Also, the parent or guardian must close SSA if the residential status of the girl child turns to NRI or if she loses Indian citizenship.

9.    Kisan Vikas Patra (KVP)

Kisan Vikas Patra (KVP) is a small savings scheme introduced for farmers and extends to all Residents of Indians above 18 years of age. KVP offers interest at 6.9% per annum, doubling the original investment in 124 months.

KVP has a lock-in period of 30 months and does not permit any withdrawals during the lock-in period. After the lock-in period, you may withdraw the investments within six months. Investment in KVP is not eligible for a tax deduction, and interest income earned is taxable.

You can invest with an amount as low as Rs. 1000 in this scheme, with no limit on the maximum investment. Most importantly, KVP certificates are easily transferable. It also offers an encashment facility after two and a half years of investment.

KVP is not eligible for any tax deduction or exemption and is not tax efficient. However, taxable income for farmers is essentially zero, so it is an ideal investment alternative.
 

Advantages of investing in post office investment schemes

A.    Risk-Return Trade-Off

The government assures payments for post office investment schemes; hence, the risk involved is minimal. The return on post office investment schemes is competitive. Generally, a savings bank account yields an annual interest of 4% per annum, whereas post office investment schemes are between 4 - 7.60% per annum. Moreover, some investments in post office schemes are eligible for tax benefits. In some cases, interest earned is exempt from tax. Therefore, the investment is tax efficient and generates high returns than a savings bank account.
 
B.    Ease of Transaction

Investing in post office schemes is easy since it involves minimal documentation and is a hassle-free procedure. The efficiency of transactions is the same for urban and rural investors. You can also access investment details online, receive auto payments in your bank account, etc.
 
C.    Diversified Schemes

Investors can choose from various schemes offered by the post office. Each scheme's features, returns, tax benefits, and investment period are unique. The schemes cater to small, medium, and large-scale investors. The post office also offers customised schemes for senior citizens, farmers, and girl children. Therefore, you may choose from different options based on your investment objective.
 

Bottom Line

Post office schemes benefit efficient retirement, pension, and financial planning. It is a virtually risk-free investment alternative with attractive returns and tax benefits. Post-office investment schemes are ideal for beating volatility associated with financial markets.