Will the absence of tax benefits make small savings schemes less attractive? Should investors in these schemes consider other options for their debt allocations? Read on to find out if you’ll need to tinker with your debt portfolios in view of the recent changes and the options before you.
Do small savings work without tax shield?
Small savings schemes, which give the twin advantages of a government guarantee and various tax benefits, have been the automatic choice for most investors for their debt portfolios. The Section 80C tax deduction benefit available on these products meant that their returns got an automatic boost, depending upon the income tax slab rate of the investor. For instance, for an investor in the 20% tax bracket, the effective yield on the National Savings Certificate (NSC), which provides deduction benefit on the investment amount as well as the interest reinvested under Section 80C, is 9.875%. But are some of the popular small savings schemes worth considering if the tax benefit is stripped off?
Senior Citizen Savings Scheme (SCSS) and Sukanya Samriddhi Yojana (SSY): Schemes like SCSS and SSY that are designed to give a higher return than comparable schemes and deposits of similar tenure and risk profile continue to be attractive options for investors looking for income in their retirement years or for accumulating the corpus for a goal, whether or not the tax benefits are availed. The interest earned on SCSS is also eligible for deduction under Section 80TTB up to ₹50,000 that adds to its attractiveness. “The deduction up to ₹1.5 lakh in the first year of making the investment may not have been that big an incentive for an investor looking to invest ₹15 lakh in a year in SCSS. The scheme provides the best combination of return and safety for a retired investor," said Naveen Rego, certified financial planner and registered investment adviser, discounting the possibility that absence of tax deduction benefit will affect the popularity of SCSS among eligible investors.
Public Provident Fund (PPF): This, too, has been a favourite with investors in small savings schemes for the long-term compounding benefits it provides and the exemption from tax at all three stages of investment—at the time of making the investment, when interest is earned and on maturity—giving it the EEE (exempt-exempt-exempt) status. “In case of PPF, the exemption from tax on the interest earned gives a boost to long-term compounding and the corpus at maturity is also exempt from tax," said Rego. He added that PPF will continue to be the best fixed-income product for risk-averse investors whether or not there is a tax benefit at the time of making the investment.
NSC: However, products like NSC may become less attractive without the tax benefits. Investors who used NSC for building an income ladder or to accumulate a corpus for short-term needs may be better off with other options. For example, the government of India’s 7.75% savings (taxable) bonds (read bit.ly/2ONPUT3 to know more about them) give marginally higher returns with the same sovereign guarantee. However, the bonds have a slightly longer tenure of seven years as compared to five years for NSC.