Non-Clinical Support » Personal Finance

Fixed income / Assured return Schemes

Government Schemes

Basics

You can invest in government schemes directly through RBI, nationalized banks, authorized distributors and post offices. Following are the main and best government fixed income schemes.

Employee Provident Fund (PF)

• The Employee Provident Fund, or provident fund as it is normally referred to, is a retirement benefit scheme that is available to salaried employees.
• Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.
• The employer also contributes an equal amount to the fund.
• However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let's say the employee decides 20% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.
• PF offers 8% rate of interest per annum compounded annually.
• The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs.
• In case of the death of the employee, the accumulated balance is paid to the legal heir.
• The amount you invest is eligible for deduction under Rs 1,00,000 limit of Section 80C.
• If you have worked continuously for a period of five years, the withdrawal of PF is not taxed.
• If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed.
• The tenure of employment with the new employer is included in computing the total of five years.
• If you withdraw it before completion of five years, it is taxed.
• But if your employment is terminated due to ill-health, the PF withdrawal is not taxed.
• If you urgently need the money, you can take a loan on your PF.
• You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home.

Public Provident Fund (PPF)

• PPF was established by the central government in 1968. The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.
• PPF offers 8% rate of interest per annum compounded annually.
• PPF is for 15 years, but you can extend it for a block of five years. Let's say you open a PPF account when you are 21 years old. It matures when you are 36 years old, when you may be earning well and may not need the money. In that case, you can continue with the account.
• You do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.
• If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.
• PPF investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000. This is as far as your principal investment goes.
• Interest earned on PPF amount is tax free.
• To open a PPF account, you can drop by any nationalized bank branch. No, you do not have to have an account with them. You can also ask your nationalized bank where you have an account if they are authorised to open PPF accounts. You can open PPF account in your child's name also.
• The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else.

National Savings Certificate (NSC)

• The NSC is a post-office savings scheme and is very safe since backed by the government.
• The minimum amount you have to put into your NSC is Rs 100 without any upper limit on investment. However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 20,000, you will have to buy two certificates of Rs 10,000 each.
• Maturity period is six years from the date of investment and Rs 1000 becomes Rs 1601 after 6 years and there is no TDS.
• NSC offers 8% rate of interest per annum compounded half-yearly (twice a year).
• Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year. This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.
• The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
• If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.
• You can hold NSC jointly or you can hold it singly and nominate someone.
• To buy an NSC, just approach any post office.

Post Office Monthly Income Scheme (POMS)

• The POMS is a post-office savings scheme and is very safe since backed by the government.
• The minimum amount you have to put into your POMS is Rs 6000 and maximum amount of investment is Rs 300000 per single account and Rs 600000 for joint account holders.
• Maturity period is six years from the date of investment.
• POMS offers 8% rate of interest payable monthly, no bonus on maturity.
• The interest received on POMS is taxable.
• Premature closure of the amount is permitted at any time after expiry of one year and before 3 years with 3.5% penalty. No deduction of penal interest will be levied if the withdrawal is made after 3 years. The bonus will not be paid on premature closure of accounts.
• To buy POMS, just approach any post office.

Kisan Vikas Patra (KVP)

• There is no upper limit of investment in KVP.
• KVP offers 8% rate of interest compounded quarterly.
• Rs 1000 becomes Rs 2000 after 8 years and 7 months and there is no TDS.

9% GOI Senior Citizens Savings Scheme

• 9% GOI senior citizens saving scheme is very safe since backed by the government.
• Only resident Indians aged 60 years and above can only invest in the scheme.
• The upper limit of deposit per person is Rs 15 lacs. Senior citizen can open this account jointly with spouse.
• Period of the scheme is five years from the date of investment and interest rate is 9% payable quarterly. Premature withdrawal is available after 1 year.
• The interest is taxable in the hands of the investor.