From PPF to Senior Citizen Savings Scheme, 13 government schemes to keep your savings 100% safe

Sunil Dhawan
Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme , Post Office Time Deposit Account, Atal Pension Yojna, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate, bank fixed deposits, BSE Sensex, stock market, budget 2019, equities, mutual funds,

Since the Budget 2019 announcements were made early last month, the BSE Sensex is down by almost 3000 points. Another 800-point fall will remove almost all the gains made in the year till date. The situation is far worse for mid and small-cap indices and if the market continues to slide further from here, the investor confidence may get shaken up soon. As on August 1, 2019, the 5-year CAGR is about 7.76 per cent and over the 7-year period it is about 11.52 per cent. Also, several individual stocks and equity mutual fund (MF) schemes, especially mid-small caps, have been showing a much dismal return over the short to medium term. But then, equities are not for shorter horizons as they hold the potential to deliver over the longer term.

If you are contemplating moving to safer havens and invest in fixed income assets, here are a few government investment schemes that come with 100 per cent safety of principal invested and the income earned.

A word of caution: The ideal approach should be to allocate one’s investments into both of these asset classes ( equity and debt) and not be entirely exposed to any one of them. Fixed-income investment is a debt asset aimed to protect or preserve the capital and provide a regular source of income, while exposure to market-linked equity asset class becomes imminent to generate inflation-adjusted return over the long term.

1. Savings (Taxable) Bonds, 2018

One may invest in the Government of India 7.75 per cent Savings (Taxable) Bonds that have a tenure of 7 years. There will be no maximum limit for investment in the Bonds and the interest income will either be paid half-yearly or on maturity. In the latter case, the maturity value of the Bonds shall be Rs 1,703.00 (being principal and interest) for every Rs 1,000 invested.

2. Government Securities

NSE in collaboration with RBI has made it possible for retail investors to start investing in Government Securities on the E-Gsec platform for facilitating the non-competitive bidding in Government of India Dated Securities (G-Sec) and Treasury Bills (T-Bills). Government Securities are risk-free instruments and helps in providing portfolio diversification and are available for longer investment durations. G-Sec is long-dated security and they pay interest twice a year. Retail investors can place their bids through trading members of NSE or using the NSE goBID mobile app or web platform. The minimum amount for bidding will be Rs.10,000 (face value) and in multiples in Rs.10,000. Although any exit before the maturity may result in capital gain or loss, the investment if held till maturity is safe as it is backed by the government.

3. Tax-free bonds

They are issued primarily by government-backed institutions such as Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development Agency, and most carry the highest safety ratings. If a new issue is not available, then one may buy and sell them on stock exchanges as they are listed securities.

Generally, tax-free bonds are long-term investments with tenure of 10, 15, 20 years. The liquidity, however, is low in tax-free bonds and therefore, invest in them only if you are sure that you will not require the funds for such a long period. The interest is tax-free and there is no Tax Deducted at Source (TDS) too. Further, they usually offer annual and not monthly interest payouts hence may not meet a retiree’s regular income requirement. If held till maturity, the safety of principal and interest exists. Currently, the YTM (Yield to maturity) is around 5.9 per cent ( coupon ate is upwards 8 per cent) in tax-free bonds as currently the interest rate is headed downwards.

4. Sukanya Samriddhi Yojana (SSY)

SSY is a 21-year scheme and can be opened only in the name of girl child below 10 years. No matter what the age of the child is at the time of SSY account, the scheme will run for 21 years from the date of its opening. For example, if the child is 7 years, the maturity of SSY will happen when the child attains 28 years.

As a parent, one has to deposit only for the initial 15 years and during the last six years even though the scheme continues, no deposit needs to be made. Only on medical grounds, one is allowed to prematurely exit from the scheme. After the girl attains the age of 18, a maximum of 50 per cent of the funds of the preceding year may be withdrawn for the girl’s higher education. In case of marriage, the SSY is allowed to be closed provided she has turned 18. SSY is a tax-friendly investment as it qualifies for tax benefit under Section 80C and even the interest earned is tax-free. Being a government-sponsored scheme, SSY carries the highest safety of principal and interest income. Currently, (July 1 to September 30, 2019), the interest rate is 8.4 per cent per cent per annum, compounded annually and paid on maturity.

5. Atal Pension Yojna (APY)

APY is an assured pension plan, the administration of which is done by the Pension Fund Regulatory and Development Authority (PFRDA) under the NPS architecture. APY is open for any Indian citizen between 18-40 years. Under the APY, the subscribers would receive the fixed minimum pension of Rs. 1000 per month, Rs. 2000 per month, Rs. 3000 per month, Rs. 4000 per month, Rs. 5000 per month, at the age of 60 years, depending on their contributions, which itself would be based on the age of joining the APY. Under APY, the monthly pension would be available to the subscriber, and after him to his spouse and after their death, the pension corpus, as accumulated at age 60 of the subscriber, would be returned to the nominee of the subscriber. There are no tax benefits in APY at any stage of the scheme. The return in APY is around 8 per cent for the subscriber.

6. Public Provident Fund (PPF)

PPF is a long term investment and requires a regular contribution to be paid for 15 years. One may, however, exit after 5 years ( subject to conditions), avail a loan from 4th year and make partial withdrawals after 7th year. As per the rules, one is allowed to open only one account in own name while another can be opened in a minor child’s name. A minimum of Rs 500 and maximum of Rs 1.5 lakh ( self plus minor account) in each financial year can be put into the PPF scheme. While the investment qualifies for tax benefit under Section 80C, the interest earned is tax-exempt. Post maturity, the PPF account can be extended indefinitely in a block of five years. Currently, ( July 1 to September 30, 2019) the PPF account carries an interest rate of 7.9 per cent per cent per annum, compounded annually and is paid on maturity.

7. Kisan Vikas Patra (KVP)

Available only at post offices, the KVP certificate can be purchased by an adult for himself or on behalf of a minor or by two adults. The minimum amount of KVP is Rs 1,000 while there is no maximum limit. There is a provision to transfer KVP from one person to another and from one post office to another. At the time of need, the KVP certificates may be encashed anytime after 2 and half years from the date of purchasing it.

Currently, (July 1 to September 30, 2019) the KVP carries a return of 7.6 per cent compounded annually. Basically, the amount invested doubles in 112 months (9 years & 4 months) and interest along with capital is paid only on maturity.

8. Post Office Time Deposit Account (TD)

The time deposit (TD) in a post office is somewhat similar to a bank fixed deposit. While the time deposits in a post office are for 1, 2 , 3 and 5 years, its only the 5-year TD that comes with section 80C tax benefit. There is no maximum limit but tax benefit is restricted to Rs 1.5 lakh each year. Interest earned is fully taxable and to be added to one’s ‘Income from other sources’. There’s only the annual interest option as it does not allow monthly or cumulative option. In post offices with core-banking, when any TD account is matured, the same TD account will be automatically renewed for the period for which the account was initially opened. Currently, (July 1 to September 30, 2019) the interest rate on 5 year TD is 7.7 per cent per annum, payable annually but calculated quarterly. Even the 1, 2 and 3 year Time Deposit is offering a competitive return of 6.9 per cent as compared to bank FDs.

9. Senior Citizen Savings Scheme (SCSS)

SCSS is a popular investment option for those who are 60 years and above. An individual of the age of 55 years or more but less than 60 years who has retired on superannuation or under VRS can also open account subject to the condition that the account is opened within one month of receipt of retirement benefits and the amount should not exceed the amount of retirement benefits. SCSS is for a period of 5 year and more than one account may be opened, but the combined limit is capped at Rs 15 lakh.

Interest earned is fully taxable and to be added to one’s ‘Income from other sources’. SCSS suits senior citizens looking for high fixed rate of return and a regular income. After maturity, the account can be extended for further three years within one year of the maturity by giving application in a prescribed format. In such cases, the account can be closed at any time after expiry of one year of extension without any deduction. Currently, (July 1 to September 30, 2019) the interest rate on SCSS is 8.6 per cent per cent per annum, payable quarterly.

10. National Savings Certificate (NSC)

NSC requires only a lump sum payment for a period of five years and there is no need to pay further contributions. On maturity, a fixed amount is received which is known right at the time of investment. NSC is issued in denominations of Rs. 100, Rs. 500, Rs.1000, Rs.5000, Rs.10,000. The interest is fully taxable but importantly interest is re-invested for the initial four years and also qualifies for Section 80C benefit. Currently, (July 1 to September 30, 2019) the interest rate on NSC is 7.9 per cent per cent per annum, compounded annually and paid on maturity i.e. Rs 100 grows to Rs 146.9 3 after 5 years.

11. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

PMVVY suits retired individuals who are aged 60 years or more and need a regular income on their investment. The PMVVY is a ten-year pension scheme subsidised by the Government of India. The amount of investment made in the scheme is called the ‘purchase price’. Depending on the pension option (monthly, quarterly, yearly), a fixed and assured pension begins as arrears i.e. start from the end of the chosen period.

The total amount of pension or the purchase price under all the PMVVY policies allowed to a family cannot exceed Rs 1.2 lakh per annum (Rs.10,000 Pension per month ) or Rs 15 lakh respectively. The scheme can be purchased offline as well as online from the LIC website only as it is only available with LIC till 31st March 2020. Currently, PMVVY offers a guaranteed rate of return of 8 per cent per annum for ten years, with an option to opt for pension on a monthly or quarterly or half-yearly or annual income.

12. Bank fixed deposit

Bank fixed deposits have always been a popular source of regular income. Depending on the bank and tenure, currently, the interest rate is between 6 and 9 per cent. Each depositor of a registered insured bank including commercial banks, scheduled banks and Small Finance Banks are insured up to a maximum of Rs.1 lakh for all bank deposits, such as saving, fixed, current, recurring deposits under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. Although, there’s an implicit guarantee, it’s better to diversify across banks also to avoid TDS if the amount of investment is high. The downside of bank FD is that it has low post-tax inflation-adjusted returns. Bank FDs, therefore, best serves as capital preservation investment. Currently, depending on the bank and tenure, the interest rate is between 6 per cent and 9 per cent in bank FDs.

13. Immediate Annuities

One may consider the Immediate Annuity schemes of life insurance companies. Being regulated by IRDAI, a government body and as insurers need to maintain adequate solvency margins even though there is no government guarantee, they can be considered reasonably safe. LIC is the only PSU insurer in the life insurance industry.

They suit those who wish to have a regular source of income till lifetime no matter which way the interest rate moves. Immediate Annuity scheme can provide a regular base-level income and therefore one may consider some portion of the savings into it. There are about 7-10 different pension options, including pension for a lifetime for self, after death to spouse and post that the return of corpus to heirs. The Immediate Annuity schemes may not suit an investor who is capable of selecting and building his own portfolio. For them, it is better to diversify across different investments and manage by oneself. Currently, the pension or the annuity is around 5-6 per cent per annum and is entirely taxable as per one’s income slab.

Conclusion

Remember, if you are for the long haul into equities, these episodes of continuous slide of the market indices need not trouble you. In fact, for SIP investors, such downtrends help in accumulating mutual fund units at a lower price, thus averaging the overall cost of equity investment. Yes, three things are important-Firstly, ensure your asset allocation towards debt and equity is managed well, and secondly, you pick the right MF scheme based on its portfolio, market-capitalization and consistency of performance over the long term. This will ensure you not only diversify across assets but also across market-caps and sectors. When the road to your goal is far away, you don't need to predict or take chances, rather be well diversified. And, lastly, have a de-risk strategy in place by shifting accumulated funds from equities to the debt assets at least three years before reaching your goal.