Indian taxpayers who have selected the new tax regime face a significant change in their investment strategy. They can no longer claim tax deductions under Section 80C for investments made in popular small savings schemes.
This exclusion affects several key government-backed savings instruments including the Senior Citizens Savings Scheme (SCSS), National Savings Certificate (NSC), Public Provident Fund (PPF), and Kisan Vikas Patra (KVP). These schemes have traditionally been favored by investors specifically for their tax-saving benefits.
Small Savings Schemes vs Fixed Deposits: Key Differences
With the tax benefit removed under the new regime, investors are questioning whether they should continue with these locked-in schemes or shift to more flexible options like fixed deposits (FDs). Here's a detailed comparison to help you make an informed decision.
Interest Rate Comparison
Small savings schemes generally offer higher returns compared to traditional bank fixed deposits. While most FDs provide approximately 6-6.5% annual interest, small savings schemes consistently deliver above 7%.
Current interest rates on popular small savings schemes include: Post Office Monthly Income Scheme at 7.4%, Senior Citizens Savings Scheme at 8.2%, Kisan Vikas Patra at 7.5%, Public Provident Fund at 7.1%, and Sukanya Samriddhi Account at 8.2%.
Tax Treatment of Earned Income
Despite the loss of Section 80C deduction under the new tax regime, small savings schemes retain a crucial advantage: the interest income remains completely tax-free. This contrasts sharply with fixed deposits where interest income is fully taxable.
Consider this example: A bank FD offering 7% interest would effectively yield only 6.3% for a taxpayer in the 10% tax bracket after accounting for tax payments. The same 7% return in a small savings scheme remains untouched by taxation, providing better net returns.
Investment Discipline and Lock-in Periods
Small savings schemes promote long-term financial discipline through their mandatory lock-in periods. When you invest in PPF with its 15-year tenure, you're essentially building retirement savings. Similarly, Sukanya Samriddhi Yojana helps parents systematically save for their daughter's future.
According to Deepak Aggarwal, a Delhi-based chartered accountant and wealth advisor, allocating approximately 30% of your portfolio to fixed income instruments is advisable for long-term wealth creation. He recommends small savings schemes alongside FDs, gold, and debt funds for financial goals with 15-year horizons.
The changing tax landscape requires investors to carefully evaluate their options based on both immediate tax benefits and long-term financial objectives.
