What Are Small Savings Schemes, Why Are They Important? Types, Interest Rates Explained
Small savings schemes such as Post Office deposits, savings certificates and social security schemes provide higher returns than bank FDs, sovereign guarantee and tax benefits
Small savings schemes are a set of financial instruments that are initiated by the central government to encourage saving among general public, especially investors and middle- to lower-income groups.
Interest rates are fixed by the government every quarter e.g. the rates for the current quarter, April to June 2025, were announced on March 31.
Let us understand what are small savings plans and on what basis the rates are fixed by the government.
What Are Small Savings Plans?
Savings schemes are popular as they not only provide returns that are generally higher than bank fixed deposits but also come with a sovereign guarantee and tax benefits.
Since 2016, the finance ministry has been reviewing the interest rates on small savings schemes on a quarterly basis. All deposits received under various small savings schemes are added in the National Small Savings Fund. The money in the fund is used by the central government to finance its fiscal deficit.
What Are The Key Features Of Small Savings Plans?
• Low risk (backed by the Government of India)
• Fixed and attractive interest rates (reviewed quarterly)
• Accessible to all citizens
• Tax benefits under Section 80C for some schemes
The small savings schemes can be grouped under: Post office deposits, savings certificates and social security schemes.
Post Office Deposits: The scheme has savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5-year maturities and the monthly income account. Currently, the interest rate is at 7.1% per annum for 3-year deposit and 6.9% for 1-year deposit. The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment. Recurring deposits have an interest rate of 6.7% for a tenure of 5 years. The Monthly Income Account is a low-risk investment that pays an interest rate of 7.40%.
Savings Certificates: The National Savings Certificate and the Kisan Vikas Patra are savings certificates. The National Savings Certificate pays interest at a rate of 7.7% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically. The NSC also qualifies for tax saving under Section 80C of the income tax act. The Kisan Vikas Patra, which is open to everyone, and comes with a return of 7.5% compounded annually. The minimum investment amount is Rs 1,000 while there is no upper limit.
Social Security Schemes: Public Provident Fund (PPF), Sukanya Samriddhi Account and Senior Citizens Savings Scheme are part of the SSS. The Public Provident Fund is a popular saving option for long term goals like retirement. It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act. Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years. The accumulated amount and interest earned are exempt from tax at the time of withdrawal. The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child. The account can be opened in the name of a girl child below the age of 10 years. The scheme guarantees a return of 8.2% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act. The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year. And finally, the 5-year Senior Citizen Savings Account can be opened by individuals who are over 60 years to age. It also carries an interest of 8.2% per annum payable quarterly and qualifies for Section 80C tax benefit.
How Interest Rates Of Small Savings Schemes Are Calculated
As per the government decision, the rate of interest on Small Savings Schemes will be aligned with Government Security (G-Sec) rates of similar maturity with a spread i.e. mark-up. For example, the spread on Senior Citizens Savings Scheme will be 1% over comparable maturity G-Secs. The rationale for linking it to G-Sec yields in the secondary market is that it is in line with interest rate movements; G-Sec yield movements reflect actual and anticipated economic events pertaining to interest rate movement, as per a report by The Hindu.
Since the Reserve Bank of India (RBI) has been reducing the reference repo rate, it is expected that it will continue to do so in the near future. This is due to lower inflation and economic growth being stagnant than earlier. The repo rate is currently at 6% than 6.5% earlier.
Thus, G-Sec yields have eased. For example, 10-year maturity G-Sec, which was at 7.2% a year ago and 6.85% six months ago, is at 6.36% now. This means, when rates for next quarter viz. July to September are announced on June 30, the reference point will be lower, as per The Hindu report.
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May 13, 2025, 11:53 IST
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