The recently presented Union Budget for 2020 has bought in immense changes to the investors. Now investors have a choice whether or not to entail the tax deduction benefits which was available for saving schemes for many years. The one who prefers to opt for new tax regime as proposed in the budget will have to offer their earnings to tax without availing any of the deductions or exemptions as classified under Section 80C of the Income Tax Act 1961.
Will the truancy of the tax benefits offered on small schemes will make them less attractive? Or Should the existing investors in these schemes should hunt for other options for parking their earnings?
Small Savings Schemes
All the savings schemes offered under Section 80C were so far available for exemption up to the set limit for computation of income tax. But the scenario will change from now on as there is no compulsion on the investors to park their funds in these schemes to get tax concession. The schemes provided a double advantage for investors as it was backed by the government and it also offered various tax benefits and hence most of the salaried individuals were drawn towards it.
Any kind of tax deduction benefit available under savings schemes listed under Section 80C would mean that the returns from them would get an automatic boost, based on the income tax slab of the investor.
Let's understand in detail about the effect on popular small savings schemes in India if the tax benefit on it is detached.
Sukanya Samriddhi Yojana (SSY)
This scheme meant for girl child is designed to fetch higher returns when compared to other savings schemes which have similar tenure and the risk factor associated with this scheme is nil because it is backed by the government of India. Apart from the investment amount, the interest amount is also tax-free as it is eligible for deduction under Section 80TTB.
Key Takeaways from Sukanya Samriddhi Yojana
- Earns interest rate of 8.50% per annum
- The minimum amount of investment is Rs 1,000 per annum
- The maximum amount of investment is Rs 1,50,000 per annum
- Deposits should be made until 14 years from the date of opening the account
- The account will mature on completion of 21 years from the date of opening of the account.
- Partial withdrawal facility available after the girl child attains 18 years of age.
The scheme provides the best combination of safety and returns to investors and the absence of tax deduction benefits is likely to affect its popularity in the coming days.
National Savings Certificate
The National Savings Certificate or NSC issued by India Post is a savings bond which encourages subscribers to invest their hard-earned money in savings to save tax. These certificates are available for investment, either for 5 years or for a 10-year tenure. It offers an interest rate which is better than the fixed deposits offered by public sector banks in India. Interest rates are subject to change every quarter by the government.
Key Takeaways from National Savings Certificate
- This government-backed savings instrument is available in two types - NSC VIII Issue and NSC IX Issue.
- Currently, the interest rates on NSC is 7.9% per annum.
- The minimum amount of investment is Rs 100 (or in multiples of Rs 100).
- The maximum amount of investment is Rs 1,50,000 per annum.
- Can be used as collateral to secure loans
Investors who so far have used NSC to build their savings for short terms needs may look out for other options like bonds issued by the government of India. The NHAI Capital Gains Bonds which are issued for a tenure of 5 years carries an interest rate of 5.75% per annum which is marginally below the rate of interest offered by NSC or you can even invest in the 7.75% Savings Bonds of 2018 which offers interest at 7.75% per annum, but the drawback here is its tenure which stands at 7 years.
Public Provident Fund (PPF)
Touted as one of the best and favourite amongst the investor community, this scheme is designed for long term investment which provides an exemption from tax - at the time of investment, on maturity and the interest earned. Best suited for risk-averse investors, this investment tool is likely to hold its sheen irrespective of tax benefits associated with it or not.
Key Takeaways from Public Provident Fund
- Tenure of investment is 15 years (long term).
- Earns an interest rate of 7.9% per annum.
- The minimum amount of investment is Rs 500
- The maximum amount of investment per year is Rs 1,50,000
- Get loan facility between third to sixth financial year
- Nomination facility is available
- The partial withdrawal facility is available after completing 5 years of investment
The exempt - exempt - exempt (EEE) status on investment, interest earned and maturity value is likely to keep the investors attracted towards the scheme irrespective of the availability of income tax benefits.
As the interest rates on the above-mentioned savings schemes are subject to change quarterly, it is better to keep a check on them regularly. The government has made a move to make the returns on these small savings schemes linked to market since 2016, but the actual implementation of the same is irregular. The link to yields of comparable government securities has not been maintained and the scenario is likely to change starting from the first quarter of 2020 - 2021 as per the regulations issued by the finance ministry.
About the Author
Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.