Can small savings schemes help you meet your financial goals?

The status quo on interest rates of small savings schemes after government withdrew orders issued by “oversight” is a welcome step. But, amid rising inflation and fiscal constraints, corroborated COVID-induced crisis, for how long the status quo will last?

Interest rates of small savings scheme are revised every quarter. These rates were not change the throughout FY21 (April 2020-March 21). There were speculations that the government may take drastic measures to reduce interest in the new financial year.

While the interest rates will hold steady till 31 June, you cannot be sure if the same rate will be retained for the following quarters.

“Small savings schemes have been a mainstay of the portfolios of large number of investors in our country. Needless to say, safety of capital and guaranteed returns are the main reasons for their popularity. However, the situation is becoming challenging in view of reduction in interest rates over the last few years in line with 10 year government securities yields,” said Hemant Rustagi, CEO of WiseInvest Advisors. Along with low interest, their returns are also not tax-free.

Pankaj Mathpal of Optima Money Managers says that if you look at the all savings schemes, TDS is deducted in all schemes except PPF and SSY fall under exempt-exempt-exempt category. In other schemes, for interest above 40,000, 10% TDS is levied, while in the senior citizen scheme, interest of up to 50,000 is not taxed. When you withdraw money from these schemes, it is added to your income and tax will be levied as per the slab. If the income does not come under the purview of tax, you can fill out Form 15G / 15H and submit it at bank / post office to ensure TDS is not deducted.

“Unfortunately, conservative investors ignore a major risk i.e. impact of inflation on their portfolios. It’s time to realize impact of this risk and include options like mutual funds to earn positive real rate of returns, that is, gross returns minus inflation and taxes. Ideally, one can begin with debt funds as well as debt oriented hybrid funds and gradually increase allocation to equities. This will help in improving portfolio return and tackle the risk of inflation, which is bigger risk than risk of losing capital for long-term investors,” Rustagi said.

We all want our money to be safe, but if there is money that you will not need for a few years, then definitely check out the new investment option. Because just remaining invested in small saving schemes will at cost of your returns.

We all want our money to be safe, but if you have a longer time horizon, you must consider investing in other instruments also. Staying invested just in small savings for your future goals may not be the most viable option considering the falling interest rates and taxability.