80C Update: 80C benefits are over, yet these government schemes are better than FDs, see the complete calculation..

Ever since the new tax regime became attractive, a major question has arisen in the minds of taxpayers. The question is, does investing in small savings schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), and Senior Citizen Savings Scheme (SCSS) still make sense? Taxpayers adopting the new tax regime no longer receive the investment deductions under Section 80C of the Income Tax Act. Traditionally, Indian investors chose these schemes solely to save taxes.

Now that this has been removed, many investors are rushing straight to fixed deposits (FDs) because there is no lock-in period. But is this hasty decision justified? A deeper dive into the data and returns reveals a different story.

Government savings schemes are outperforming FDs.

First, let's talk about profitability, i.e., interest rates. It's crucial to compare the growth you get from keeping your money in a bank versus the growth you get from government schemes. Considering the current market conditions, most banks are offering around 6 to 6.5 percent annual interest on their fixed deposit (FD) schemes.

In contrast, government-backed small savings schemes are still offering returns of over 7 percent. Take a look at the figures:

Post Office Monthly Income Scheme: 7.4% interest.
Senior Citizen Savings Scheme (SCSS): 8.2% interest.
Kisan Vikas Patra (KVP): 7.5% interest.
PPF: 7.1% interest.
Sukanya Samriddhi Yojana: 8.2% interest.

These figures clearly show that if returns are the sole criterion, government schemes are far ahead of bank FDs. Earning returns of over 8 percent without any risk is a significant achievement in today's times.

Whose earnings are more tax-efficient?
When investing, it's not enough to just look at the interest rate; it's also important to consider how much money you get after tax deductions. A key advantage of small savings schemes is that even under the new tax regime, the tax impact on their income can be lower or even zero compared to fixed deposits (especially in schemes like PPF and Sukanya Samriddhi).

Let's understand this with a simple example. Suppose a bank is offering you 7% interest on an FD. If you fall in the 10% tax slab, you will have to pay 10% tax on that interest income. This means that your net return after tax deductions will be reduced to just 6.3%.

On the other hand, the interest earned on schemes like PPF and Sukanya Samriddhi is completely tax-free, regardless of your tax regime. This means that the 7.1% or 8.2% you see will go entirely into your pocket. Despite the lack of Section 80C exemption in the new tax regime, the tax-free interest makes these schemes more attractive than FDs.

Lock-in Period, Not a Compulsion
Investors often gravitate towards FDs because they fear their money will be locked in. However, from a financial discipline perspective, the lock-in period of small savings schemes is actually a boon.

When you invest in PPF, which has a 15-year lock-in period, you are unknowingly building a substantial fund for your retirement. Similarly, by investing in the Sukanya Samriddhi Yojana, you secure a fixed sum for your daughter's future. FD funds are liquid (withdrawable quickly), so people often spend them on small needs, leaving larger goals behind. Locking money for a period of time is crucial for long-term wealth creation.

How to Balance a Portfolio?
Now the question arises: what strategy should a typical investor adopt? Should all the money be invested in government schemes? Deepak Agarwal, a Delhi-based chartered accountant and wealth advisor, says that balance is crucial in investing.

Deepak Agarwal advises, “To build wealth over the long term, it is wise to invest about 30% of your portfolio in fixed income instruments. When your financial goals are 15 years or more away, don't rely solely on fixed deposits. You should include a mix of fixed deposits, gold, debt funds, and especially small savings schemes like PPF and Sukanya Samriddhi Scheme in your portfolio.”

Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.