Small Savings Schemes Vs Fixed Deposits - What's The Wiser Investment Bet For Taxpayers?

With the introduction of the new tax regime, the appeal of small savings schemes has declined. This is mainly because the new tax regime does not offer deductions under Section 80C of the Income Tax Act, 1961.

Government-backed small savings schemes have traditionally remained preferred instruments for investors due to tax benefits and steady returns. These schemes include Senior Citizens Savings Scheme, National Savings Certificate (NSC), Public Provident Fund (PPF), Sukanya Samriddhi Scheme and Kisan Vikas Patra (KVP).

However, taxpayers opting for the new tax regime can’t claim deductions for investments in these schemes. Tax-saving investments qualify for deductions only under the old tax regime. Without 80C deduction benefits, investors are reassessing their choices and looking for other traditional investment options such as fixed deposits (FD).

Generally, risk-averse investors opt for FDs due to steady returns. However, returns on FDs are not very attractive, which is again a concern for many investors. This is why it is important to consider whether small savings schemes are still be more rewarding for investors looking for both tax benefits and secure returns.

Even without tax benefits, the government-backed small savings schemes remain a reliable investment option for conservative investors due to secure returns. They offer guaranteed returns and some come with tax benefits, which provide them an edge over FDs.

Interest earned: Most small savings schemes offer comparatively higher interest rates than most bank FDs, which typically earn around 6 to 6.5% per annum. In comparison, the Post Office Monthly Income Scheme offers 7.4%, the Senior Citizens Savings Scheme gives 8.2%, Kisan Vikas Patra provides 7.5%, the Public Provident Fund offers 7.1% and the Sukanya Samriddhi Account also gives 8.2%.

Tax On Interest Earned: Some small savings schemes, such as PPF, are considered attractive investment options because the interest earned and the overall maturity value of the corpus are fully tax-free. Similarly, interest earned in the Sukanya Samriddhi Account is also tax-free. In contrast, FDs attract tax on the interest earned, which effectively lowers the overall returns.

Discipline: Another key difference is that small savings schemes help build financial discipline. Most of these schemes come with extended lock-in periods, which compel the investors to remain committed in these funds over a long period. For instance, PPF has a 15-year lock-in period, making it an ideal option for steady, long-term investment goals. Similarly, NSC has a five-year lock-in period, making it a good option for a medium-term investment outlook.

Overall, the decision to invest in these funds remains a personal choice based on goals, risk tolerance and liquidity needs. But a careful evaluation of their returns, taxation rules and features can be helpful for an investor to maximise gains.