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Home / IAS Preparation / Small Savings Instruments UPSC

Small Savings Instruments: Features, Classification & More | UPSC Notes

Last Updated on Oct 10, 2024
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Small Savings Instruments are the financial instruments planned under the Public and Provident Fund of the Government to promote savings among people in general. It forms a part of the fiscal policy and has been instrumental in the development of the economy of the country. Relatively better interest rates, income-tax exemptions, and the guarantee of returns have made it more attractive to risk-averse investors. Hence, instruments managed by the Ministry of Finance serve as not only a safe channel for investment but are further important for the goals of the governments to promote financial inclusion and a stable economy.

The topic Small Savings Instruments is closely related to the UPSC exam syllabus, since a large part of this topic comes under the umbrella subject of Economic Development for General Studies Paper III. This subject encompasses all areas of the Indian Economy, with various government plans that aid in promoting financial inclusion, mobilizing domestic savings, and contributing to overall economic growth. Knowledge of such instruments is significant for UPSC aspirants since these are the fundamental forms of economic policy framework and financial structure of the nation.

GS Paper

General Studies Paper III

Topics for UPSC Prelims

Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS), Kisan Vikas Patra (KVP), Post Office Monthly Income Scheme (POMIS), Recurring Deposit (RD)

Topics for UPSC Mains

Contribution to Household Financial Security, Role in Mobilizing Domestic Savings

What are Small Savings Instruments?

Small Savings Instruments are a type of savings product created by the government to encourage saving habits in people. Such instruments comprise diversified schemes such as the Public Provident Fund, National Savings Certificate, Kisan Vikas Patra, Sukanya Samriddhi Yojana, and so on. They are trying to channel small savings from all sections of society in a safe and lucrative way of investing money. The return for these instruments is also relatively higher than what commercial banks would give on a traditional savings account. They are also supported by tax benefits through various sections of the Income Tax Act that makes them more attractive to taxpayers.

Read the article on the List of Latest Government Schemes of India!

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Key Features of Small Savings Instruments

Small Savings Instruments have various characteristics that made them popular investment schemes for many. They feature:

  • Guarantee of the Government of India: Guaranteed fully by the Government of India both on principal amount and interest earned, thus maximum safety towards your money.
  • Attractive Interest Rates: These instruments normally offer more attractive rates of interest than a regular savings account in commercial banks. The Ministry of Finance also reviews the rates quarterly, which update the interest rates as prevailing economic conditions prevail.
  • Tax Benefits: Investments in most of these instruments are eligible for tax deductions under Section 80C of the Income Tax Act. This reduces taxable income.
  • Variety: Diverse range of Small Savings Instruments available under different tenures for short-period investments to long-term investments.
  • Easy Accessibility: Well spread out post offices and nationalized banks in the nook and corner of the country, hence accessible equally to the rural and urban investor.
  • Low Risk: In view of government support and assured returns, it is a safe investment.

Read the article on the Lightweight Payment and Settlement System (LPSS)!

Classification of Small Savings Instruments

Small Savings Instruments can broadly be categorized into three groups based on their nature and tenure:

  • Savings Deposits: These include Post Office Savings Account and Post Office Recurring Deposit (RD). The instruments closely resemble bank savings accounts but pay higher rates of interest.
  • Monthly Income Schemes: In this category, the Post Office Monthly Income Scheme (POMIS) comes. This is for the person wishing to have a regular and assured monthly income.
  • Investment Instruments: This encompasses a variety of long-term savings instruments like PPF, NSC, KVP, and Sukanya Samriddhi Yojana, aimed at long-term financial planning and goals.

Read the article on the Postal History of India!

Advantages of Small Savings Instruments

Small Savings Instruments provide numerous advantages that have made them attractive to a large segment of investors:

  • Safety and Security: The main benefits of these instruments include their safety and security of the principal and assured returns by the government, thus being a very safe investment option.
  • Better Returns: The rates of interest on Small Savings Instruments are competitive and usually higher in comparison with the regular savings account offered by any other bank.
  • Tax Benefits: Many Small Savings Instruments come with tax deductions under Section 80C of the Income Tax Act, thus saving on tax while accumulating wealth.
  • Financial Inclusion: These instruments are available all over the country, located in post offices as well as in banks, thus bringing about financial inclusion by reaching the rural and the urban citizen.
  • Income in terms of recurring receipts: Most schemes, such as POMIS and SCSS, generate recurring receivables, which are very helpful for certain sections of the population that have income withdrawn from their account, more particularly the retired ones.
  • Inducing Savings Discipline: Tenures that are fixed and annual contribution compulsion induce disciplined savings among people.

Read the article on India Post Payment Bank (IPPB)!

Challenges Associated with Small Savings Instruments

Though Small Savings Instruments have many advantages, they face a number of problems:

  • Low Returns Than the Market: Though the returns are assured, they might be lower returns compared to market-linked instruments such as mutual funds and equities. This could mean lesser wealth creation in the long term.
  • Risk of Inflation: The inflation-proof fixed returns may not always keep pace with inflation, thus eroding the real worth of the corpus saved over time.
  • Liquidity Constraints: Some instruments are characterized by lock-in periods whereby the amount invested cannot easily be liquidated in a case of an emergency.
  • Complexity in Understanding: Many of the schemes on offer have very disparate terms, conditions, and benefits, making it difficult for some investors, especially the less financially literate ones.
  • Limited Flexibility: Some scheme structures are rigid, with both deposits and withdrawals-which may not favor all individuals' varying financial needs and circumstances.

Read the article on Payment Banks in India!

Important Small Savings Instruments in India

The small savings instruments that India is offering include the following, each carrying specific offerings and benefits:

Public Provident Fund

PPF is a very long-term saving instrument carrying a tenure of 15 years. It acquired the interest rate of 7.1% that the Ministry of Finance keeps updating recently. Contributions to PPF are eligible for tax deductions under Section 80C and the interest earned is tax-free.

National Savings Certificate NSC

This is a fixed-income investment by tenure of 5 years, offering 6.8% interest compounded annually payable at maturity. Investment in NSC qualifies for tax deduction under Section 80C.

Kisan Vikas Patra (KVP)

KVP is a savings scheme that aims essentially to obtain double the amount of money invested in around 123 months. It carries an interest rate of 6.9%. This is a long-term risk-free investment where a minimum investment limit is Rs. 1,000, and there is no specific upper limit.

Sukanya Samriddhi Yojana

This scheme is available for education and marriage expenses of girl children. It offers 7.6% rate of interest with tax benefits under Section 80C. An account can be opened for a girl child who is below the age of 10. When she becomes 21 years old, the account gets matured.

Senior Citizen Saving Scheme

SCSS is offered exclusively for senior citizens, with an interest rate of 8.0%. It carries a maturity tenure of 5 years, extendable up to 3 additional years. Investment under SCSS also enjoys income tax benefits under Section 80C.

Post Office Monthly Income Scheme

Under the Post Office Monthly Income Scheme, a fixed monthly income is received at an interest rate of 6.6% and at the maturity period of 5 years. Suitable for such investors who seek regular and assured returns with minimal risk.

Post Office Recurring Deposit (RD)

The Post Office RD Scheme encourages savings month after month with an interest rate of 5.8% compounded quarterly over a term of 5 years. It is suitable for those who generate a corpus through periodical investment.

Read the article on the Government Schemes for Agriculture and Farmers' Welfare!

Conclusion

Small Savings Instruments constitute an important component of India's financial planning system by providing a safe and sure avenue for it to save and invest. These instruments are vital to achievement in terms of financial inclusion as they will make investing in the progression of the Indian economy accessible to a diversified socio-economic variety of investors. In light of these instruments, if the government supports and offers attractive interest rates along with tax benefits, these financial instruments form one of the best constituent elements of the Indian financial situation.

Key Takeaways for UPSC Aspirants

  • Definition: Financial tools that form part of India's small savings schemes, designed to mobilize savings from the general public into the formal financial sector.
  • Examples: The instruments here include PPF, National Saving Certificate or NSC, KVP, and POMIS of the post office.
  • Government Backed Security: The return accrued including principal carries a sovereign guarantee, making it highly secure and reliable investment options.
  • Interest Rates and Return: These instruments offer fairly competitive returns which are reviewed and revised periodically by the government.
  • Tenure and Lock-In Periods: Various instruments offer varying tenure, short-term to long term, aimed at answering the different financial objectives and needs.
  • Accessibility and Convenience: Highly accessible with a huge network of post offices and nationalized banks across India that delivers financial inclusion.
  • Tax Efficiency: Many instruments are tax-free or have tax benefits and thus can be used as an attractive source of tax planning and savings.
  • Role in Financial Planning: These instruments will help for safe and steady wealth accumulation providing guaranteed returns which are quite crucial for middle-class as well as lower-income households.

We hope your doubts regarding the topic have been addressed after going through the above article. Testbook offers good quality preparation material for different competitive examinations. Succeed in your UPSC IAS exam preparations by downloading the Testbook App here!

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Small Savings Instruments UPSC FAQs

Investments in many small savings instruments are provided with tax benefits under Section 80C of the Income Tax Act.

The best advantage is the security and safety through government backing plus guaranteed returns along with tax benefits.

These instruments offer fixed returns, which often tend to fail the test of matching inflation. This would perpetuate declining real value in saving.

Yes. Some instruments require lock-ins, which goes against the concept of liquidity, and deprives access in cases of emergencies.

Small savings instruments yield a notch lesser returns than those obtained from market linked instruments such as mutual funds, equities but are more secure.

Sukanya Samriddhi Yojana is to save for the education and marriage of girl children.

Interest rates are reviewed every quarter by the Ministry of Finance. Till today, the best rates are available for PPF at 7.1% and for NSC at 6.8% and Sukanya Samriddhi Yojana at 7.6%.
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