Post Office Small Savings Schemes: Details & Interest Rates [2018-19]

In Indian culture, savings are considered to be essential...

...in fact, the first thing you are taught once you start earning is to take some portion out of your monthly salary and invest it wisely.

Now there are many investment options out there (see: best short term investment options), but if you want assured returns without any market risk whatsoever, you should look at post office savings schemes.

Post office small saving schemes will not offer as high returns as market linked investment products (like mutual funds), but their return is guaranteed by the government of India and hence it's as risk-free as it gets.

Now, if you have ever gone to your local general post office, you have probably discovered that they have 9 different investment options.

What are these 9 options? And which one is actually suitable for you?

Let's see...

Deposit Schemes

1. Post Office Savings Accounts

Just like a bank, you can open a savings account in a post office as well. Also like a bank, you will earn an interest of 4% per annum on your savings account in the post office.

You need a minimum of INR 20 in cash to initially open the account. And if you don't want a cheque facility, you only need to maintain a minimum balance of INR 50. However, in case you want cheque facility, you will need to have a minimum balance of INR 500. This is very attractive as most big banks will have a minimum quarterly balance requirement of about INR 5000 or more.

Just like interest on a savings account in a bank, interest in a post office savings account too qualifies for tax exemption under section 80TTA. Essentially, any interest that you earn up to INR 10k is tax free for you.

Unlike banks where you can open up multiple accounts in the same branch, in one post office, you can only open up one account. You can transfer this account from one post office to another quite easily.

You can also open accounts in name of minors and convert same accounts to their name once they attain majority. Joint accounts with two or three adults are possible too. Converting any single account to a joint account or vice versa is allowed as well.

Do note that you will need to do at least one transaction in three financial years to keep your account active. The good news is that post offices are enabling core banking solution (CBS). And for all CBS post offices, you will be able to do deposit or withdrawal transactions very easily through electronic mode. You can also get an ATM cum debit card if your account is in one of the CBS post offices.

Post offices are there in every nook and corner of the country and once CBS kicks in completely, they will compete hard with bank savings accounts both from returns and convenience perspective.

2. Post Office Time Deposits (TDs)

Post office time deposits (or term deposits as they are called sometimes) are another interesting investment option. Think of them as akin to fixed deposits in banks.

Essentially, you can deposit your money for a fixed term - 1 year, 2 years, 3 years or 5 years and get your principal plus interest back after the term is over. Exactly same as a standard fixed deposit.

TDs are available at all head and general post offices across India. Any individual can open up the account through cash or cheque. A minimum amount of INR 200 is needed and you don't have any maximum investment limit for these accounts.

Unlike post office savings accounts, you can open up any number of time deposits in a single post office.You can have a single or a joint account and convert one to another with ease. You can also open an account in the name of a minor, but that has to be converted to their name once they attain majority age.

In case you get transferred, you can shift your accounts from one post office to another pretty easily too.

In CBS enabled post offices, on maturity, your TD will be automatically renewed for the original period. e.g. if you go for a 3 year time deposit, at maturity, it be renewed for another 3 years with the interest rate as applicable on the day of maturity.

In case you invest for 5 years, your investment is eligible for Section 80C benefit and hence you can claim your investment as a deduction from your overall taxable income.

The interest on TD accounts is payable annually, but they get calculated quarterly. Government notifies these interest rates from time to time.

The current interest rates on TDs, as effective from April 1st, 2017, are as follows:

Any interest income from a POTD account is taxable though there is no TDS deduction unlike banks who deduct TDS if your FD interest income goes beyond INR 10000 in one single financial year.

3. 5 Year Post Office Recurring Deposits (RD)

Similar to banks, India post too offers a recurring deposit scheme where you can do your investments at regular intervals.

You need a minimum deposit of INR 10 per month and then can subsequently deposit any amount in multiples of INR 5. There is no maximum limit to how much you can save.

Just like post office TDs, you can open your account by cash or cheque, can have any number of accounts in one post office, can have an individual or a joint account, can open up an account in the name of a minor and can transfer your account from one post office to another.

If your account is opened prior to 15th of any month, your subsequent deposits too have to be done by the 15th of next month. If it was opened after 15th, you have time till the last working day of subsequent month to make the deposit.

Please note that you should not miss these deposits as a default fee is applicable at a rate of 5 paise per 5 INR. And after 4 continuous months of default, your account will be discontinued.

If your account is discontinued, you have a grace period of another 2 months to revive the account by paying the default fee and cumulative deposit amount but if you don't exercise that option, you won't be able to make any further deposits. To prevent such scenarios, you can make an advance payment for future months.

Post office recurring deposits are somewhat liquid as you can do one premature withdrawal of up to 50% after 1 year of deposits. Once your account matures, you have a choice to continue it for another 5 years (on a year to year basis).

The interest on these accounts is compounded quarterly and is notified by government periodically. Current interest rate on these accounts, as effective from Jan 1st, 2018, is 6.9% per annum. This is a reduction from the earlier rate of 7.1%. The interest is taxable though not subject to TDS.

Schemes for Accumulation of Corpus

4. National Savings Certificates (NSCs)

National Savings certificates are an extremely popular investment option as they also act as a tax saving instrument. Any deposit made in NSCs is tax exempt up to a limit of 1.5 lakhs under section 80C of Income tax act.

These certificates come with a maturity of 5 years. You can invest a minimum of INR 100 with no maximum limit.

NSCs can be purchased by adults for themselves or on behalf of a minor. HUFs and trusts can't invest in these certificates.

In case of NSC VIII and NSC IX, one transfer of certificates from one person to another is allowed between the date of issue and the date of maturity. Most banks will also issue loans against NSCs as a guarantee. So there is some semblance of liquidity though objectively it's pretty poor.

The current interest rate on NSCs is 7.6%, which has been effective since Jan 1st, 2018. This interest is compounded annually, but is only payable at maturity.

Please note that in addition to the principal amount being invested, even the interest accruing annually is eligible for tax rebate under section 80C as it is deemed to be reinvested automatically (so it will count towards your 1.5 lakhs limit).

5. Kisan Vikas Patra (KVP)

Kisan Vikas Patra is another tax saving instrument that allows investors to invest for long durations. The returns on KVPs are guaranteed and zero risk..

KVPs can be purchased from any departmental post office. These can be purchased by any adult in their name or as a joint holding with another adult or on behalf of a minor. Just like NSCs, HUFs can't invest in KVPs. NRIs are also not allowed to invest in these certificates. However, trusts are allowed to invest.

The minimum amount for a KVP investment is INR 1000 and there is no maximum limit. The denominations available are INR 1000, INR 5000, INR 10000 and INR 50000.

These certificates can be transferred from one person to another and from one post office to another. Additionally, KVPs can be encashed after 2.5 years from the original date of issue.

As per currently notified rates, you will earn an interest of 7.3% on KVPs.

The principal invested under this scheme is eligible for deduction under Section 80C of Income Tax act. However, any interest income you earn is taxable.

6. 15 year Public Provident Fund (PPF)

PPF is probably amongst the most popular investment options in India. And for a good reason. Like big banks do now, post offices too allow you to open and operate PPF accounts.

You can open a PPF account with just INR 100 but you have to invest a minimum of INR 500 every year. The maximum amount per year is limited to INR 150000.

You can't open up joint PPF accounts, but can open accounts in name of minors. If you do so, the total amount invested across all PPF accounts should be less than maximum limit of 1.5 lakhs.

These accounts mature in 15 years and can be extended for a further 5 years at a time. No premature closure is allowed before 15 years. However, a small withdrawal is permissible every year from 7th financial year. Additionally, you can also avail of a loan facility starting the 3rd financial year.

The current interest rate on PPF accounts is 7.6%. This interest is compounded yearly and is subject to revision by the government from time to time.

The deposits in PPF account are eligible for deduction under section 80C of IT act. But the best part about PPF is that the interest income you earn is completely exempt too. Yes, this is amongst very very few investment options where the returns you earn are completely exempt from taxes.

PPF is a true exempt-exempt-exempt investment option. The contribution, interest and maturity amount - all of them are tax-free. And the effective interest rate you are earning is much higher. Yes, it comes with a long initial lock-in but once you are past first 15 years, the effective lock-in too reduces to 5 years.

My strong recommendation is that if you don't have a PPF account, get one opened asap.

7. Sukanya Samriddhi Accounts

Government of India introduced Sukanya Samriddhi Yojana to provide some financial security for the girl children.

These accounts can be opened in the name of your girl child if she is under 10 years of age. You can open up maximum of one account for one girl child and a maximum of two in case you have multiple girl children.

The minimum amount to be invested is INR 1000 while the maximum is INR 150000 in one financial year.

If you don't deposit at least INR 1000 in a year, your account will be discontinued and you will have to revive it after paying a penalty of INR 50/year.

These accounts can be closed after completion of 21 years. A premature closure is allowed after 18 years if the girl is married. Partial withdrawal, upto a maximum of 50% of balance, can be done once the account holder attains 18 years of age.

The current interest rate on Sukanya Samriddhi Accounts is 8.1%, effective starting Jan 1st, 2018. This interest is calculated on a yearly basis and is compounded yearly too.

The deposits made under this scheme qualify for Section 80C and hence are eligible for deduction. More importantly, the interest received is also tax free just like PPF. Another true exempt-exempt-exempt investment option.

The returns offered under this scheme are amongst the best in addition to them being completely tax-exempt. This is an extremely attractive investment vehicle if you are ok with the long lock-in period.

Do note that only Tamilnadu government offers a similar post office saving scheme for a boy child - 'Ponmagan Podhuvaippu Nidhi'. This scheme doesn't cover rest of India.

Regular Income Schemes

8. Post Office Monthly Income Schemes

Post office monthly income scheme is another interesting investment option for those who are looking for a periodical but risk-free monthly income.

The minimum investment amount is INR 1500. The maximum an individual can invest in one single account is INR 4.5 lakhs. However, if you have a joint account, you can go up to a maximum of INR 9 lakhs.

You can make deposits either through cash or cheque and can transfer your accounts from one post office to another. You can open up multiple monthly income accounts, but the overall total across all those accounts has to be less than the maximum prescribed limit.

The maturity period of this scheme is 5 years. You can prematurely encash after one year, but there will be a penalty of 2% of deposit. If the premature withdrawal happens after 3 years, the penalty reduces to 1%.

Current interest rate, applicable effective Jan 1st, 2018, is 7.3%. This interest is payable to your account on a monthly basis. It is possible to get an auto-credit of your monthly interest amount in case you have a savings account at the same post office.

Any interest you earn on post office monthly investment scheme is subject to taxes as per your tax slabs.

9. Senior Citizen Savings Scheme (SCSS)

Just like banks offer special senior citizen FDs, post offices too have a senior citizen savings scheme, specially targeted at the elder generation of our country.

Anybody who is more than 60 years of age can invest in these schemes. Also, the individuals who are between 55 and 60 years of age but have just retired can open up an account within one month of receipt of retirement benefits. In such cases, though, the amount to be deposited should not exceed the total amount of retirement benefits.

You can only make one deposit in this account.

The minimum is INR 1000 and maximum should not exceed INR 15 lakhs. In case the amount to be deposited is below 1 lakh, you can deposit cash. But, only cheques are accepted for amounts above 1 lakh.

A depositor may have multiple accounts, but the total sum across all these accounts should be less than maximum investment allowed. Jointly operated accounts alongside spouse are allowed and the first depositor in the joint account is considered to be the investor.

The maturity period for SCSS is 5 years. Premature withdrawal is allowed after 1 year with a penalty of 1.5% of the deposit amount. If the withdrawal happens after 2 years, the penalty will be 1% of the deposit amount.

You can extend the investment for a further period of three years after maturity. If you go for scheme extension, you can close the account at any time after expiry of one year of extension without any penalty.

SCSS earns an interest rate of 8.3% as per currently notified rates. This interest is paid quarterly to your account. You can get this interest auto-credited if you have a savings account at the same post office.

Investment under this scheme is eligible for benefits under Section 80C. However, the interest that you earn is subject to tax and TDS will be deducted if interest amount is more than 10000 per annum.

This is a good option if you want to invest your retirement corpus in a safe investment vehicle. Post office interest rates for senior citizens, as offered through this scheme, are amongst the very best. So give this scheme a serious look.

Post Office Saving Schemes for Income tax benefits

Six of 9 post office schemes are eligible for tax benefits under section 80C i.e you can get the benefit of a deduction of up to INR 1.5 lakhs from your taxable income. These eligible schemes are as follows:

1. Post Office Time Deposits (TDs)
2. National Savings Certificates (NSCs)
3. Kisan Vikas Patra (KVP)
4. 15 year Public Provident Fund (PPF)
5. Sukanya Samriddhi Accounts
6. Senior Citizen Savings Scheme (SCSS)

Further, for PPF and Sukanya Samriddhi accounts, even the interest you earn is fully tax-exempt too. In all other schemes, the interest earned is subject to taxes.

And that's all, my friends...

I have covered pretty much everything about currently available post office saving plans. And you should now be able to choose the right investment option for yourself.

But, in case, you have more questions, let me know...