InvestorQ : Can you give me a list of key savings instruments wherein I can park my funds with safety for the short to medium term with hardly any risk?
Moii Chavate made post

Can you give me a list of key savings instruments wherein I can park my funds with safety for the short to medium term with hardly any risk?

Sam Eswaran answered.
3 years ago

Here are some key instruments to park your savings:

Bank Fixed Deposits

Bank FDs, as they are popularly known, offer a higher rate of interest than your normal savings account. However, most bank FDs currently offer between 7-8% returns, which may not be too high if you consider inflation and the impact of taxes. Remember, FD interest is taxed at your peak tax rate. While such bank FDs are almost free from default risk, they do have a risk of better opportunities foregone. Bank FDs can offer tax benefits under Section 80C, under the overall limit of Rs.150,000 per annum if the savings are deposited in long term FDs with maturity of 5 years and above. While Bank FDs technically have a lock-in, any financier will be willing to give you a loan against your FD, which effectively makes it liquid in the event of any emergency.

Corporate Fixed Deposits

Corporate FDs offer a slightly higher rate of return compared to bank FDs, but then they also entail a higher degree of risk. If the company that has issued the FD defaults on its interest and principal commitments then the loss is yours. Since, such company deposits are typically unsecured you will not have any means of recovering the amount deposited. Also in terms of tax treatment, company FDs are quite inefficient since the interest on company FDs is taxed at your peak rate

Senior Citizens Savings Schemes

The Senior Citizens Savings Scheme (SCSS), as the name suggests is restricted to senior citizens above the age of 55. Such SCSS accounts can be opened either at a scheduled bank or even at the nearest post office. However, this deposit under the SCSS can only be made out of your retirement benefits and that too subject to a maximum limit of Rs.15 lakhs under all heads. To be eligible to invest in SCSS, you must either be 60 years old and this age limit gets lowered to 55 in case you have opted for superannuation. The second condition for SCSS is that there can be only 1 deposit into this account. Withdrawals are permitted from the account after completion of 1 year but with a penalty clause. The SCSS deposit currently attracts an interest rate of 8.5%.

Sukanya Samriddhi Yojna (SSY)

This special scheme was launched in January 2015 by the Honourable Prime Minister of India, Shri Narendra Modi, under the Beti Bachao, Beti Padhao program. The SSY is intended to save and provide for the education and marriage expenses of the girl child. The SSY account can be opened either at a bank or at the post office and has to be opened before the girl child turns 10 years of age. While the account has a maturity period of 21 years, there is a facility of partial withdrawal of the money up to 50% when the girl child attains 18 years of age. The SSY account can only be opened by the girl child’s parents or legal guardians and is subject to a maximum deposit limit of Rs.150,000 per annum. The SSY scheme is also eligible for tax exemption under Section 80C of the Income Tax Act. Interest rates on the SSY are relatively more attractive compared to other deposits of similar tenure.

Post Office Time Deposits (POTD)

As the name suggests, these POTDs can be opened at any departmental post office near to you. The minimum amount to be deposited in a POTD is Rs.200 and there is no upper limit. The rates of interest depend on the time to maturity. For example, a 1-year deposit attracts 7% interest while a 5-year deposit attracts 7.8% interest. Of course, these rates are subject to change from time to time and will be notified by the Indian Postal Department. POTD accounts can be opened either in individual names or joint names and can also be opened in the name of a minor. POTDs are typically automatically renewable for the same period as your original deposit. POTDs maturing after 5 years will also give an additional tax exemption under Section 80C of the Income Tax Act.

Post Office Monthly Income Scheme (POMIS)

The POMIS is also a post office deposit which attracts interest rate of 7.70%. There is a maximum investment limit of Rs.4.50 lakhs in an individual account and Rs.9.00 lakhs in a joint account. In case of multiple POMIS accounts, the collective limit for all the accounts put together will be Rs.4.50 lakhs. The scheme is suited to retirees who are dependent on regular income since the interest is credited to your account each month. The POMIS can be cashed prematurely after 1 year by paying a charge of 2% and after 3 years by paying a charge of 1% of the withdrawn amount. There was a 5% bonus payable on POMIS accounts on maturity but this bonus has been scrapped effectively December 2011 and is not payable any longer.

Post Office Recurring Deposits (PORD)

The PORD, as the name suggests, is a regular savings account with the post office with a maturity period of 5 years. Like most Post Office accounts, the account is automatically renewed on the date of maturity for a similar period. A PORD account can be commenced with a monthly outlay of as low as Rs.10 per month. The PORD pays interest at 7.3% currently which is compounded quarterly for calculation purposes. Effectively, this means that a monthly deposit of Rs.10 will grow to Rs.725.05 at the end of 5 years after considering compounding effect.

Kisan Vikas Patra (KVP)

The Kisan Vikas Patra (KVP) can be purchased from any post office across the counter. The KVP carries a rate of interest of 7.7% and matures in a period of 112 months. KVPs can be purchased from any post office and can either be purchased by an adult in his/her own name on the name of a minor. The minimum denomination for investment in KVP is Rs.1000 and there is no upper limit for investment in KVP. Investors need to remember one important thing about KVPs. The interest is paid out only on maturity, but the accrued interest must be shown as income each year while filing your tax returns and tax needs to be paid accordingly. It needs to be remembered that KVP used to be eligible for tax exemption but is no longer eligible for any tax exemption under Section 80C of the Income Tax Act. KVP instruments are easily transferrable and can also be offered as eligible collateral to take loans.

National Savings Certificates (NSC)

The NSC is also offered as a deposit scheme by the Post Offices. NSC is similar to the KVP in the sense that the interest is accrued and not paid out each year; but only at maturity. But the key difference is that interest paid on the NSC is tax-free while interest paid on the KVP is taxable. The second advantage that NSC has over KVP is that while KVP is not eligible for exemption under Section 80C of the Income Tax Act, investments in NSC are eligible for such exemption subject to the overall maximum limit of Rs.150,000. The annual interest accrued in NSC is 8% which makes it slightly more attractive than the NSC, apart from the tax benefits that NSC proffers.

RBI Relief Bonds

The 8% RBI Relief Bonds used to be an attractive investment avenue as long as the tax benefits were available on the bond. Previously, the interest on the RBI Relief Bonds issued by the Reserve Bank of India was tax-free. However, subsequently, the interest on RBI bonds was not only made taxable, but there was also TDS deduction on this interest, making the instrument relatively unattractive in post-tax terms. The bonds have a maturity of 6 years and there is no upper limit on investments. Investors have a choice of opting for the non-cumulative (where interest is paid 6-monthly) or cumulative (where interest is accrued every 6 months and assumed to be re-invested). The removal of tax benefits has taken the sheen away from the RBI bonds.