How do Small Saving Schemes compare to Inflation?

On March 31, 2022, Govt of India announced the Interest Rate for various Small Saving Schemes like PPF, NSC, SCSS, etc., for Q1 FY22-23. There were a lot of murmurs that the rate would be reduced, but the government kept the same interest rate which last changed in April 2020 with the on-slaught of COVID'19. During the same period, Inflation has continuously increased. It is currently out of the comfort zone of RBI, which is in-between 2% to 6%. This article will compare various small saving schemes and show their return compared to Inflation since their inception. Let's first discuss what Inflation is?

Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time.

Source: https://www.financialexpress.com/what-is/inflation-meaning/1618981/

Let us plot the historical inflation rate for India.

Inflation

% Source: https://www.macrotrends.net/countries/IND/india/inflation-rate-cpi
DT = datetime(2020:-1:1960,4,1)';
Rate = [6.62; 3.72; 3.95; 3.33; 4.95; 4.91; 6.65; 11.06; 9.31; 8.86;...
? ? 11.99; 10.88; 8.35; 6.37; 5.80; 4.25; 3.77; 3.81; 4.30; 3.78; 4.01;...
? ? 4.67; 13.23; 7.16; 8.98; 10.22; 10.25; 6.33; 11.79; 13.87; 8.97;...
? ? 7.07; 9.38; 8.80; 8.73; 5.56; 8.32; 11.87; 7.89; 13.11; 11.35;...
? ? 6.28; 2.52; 8.31; -7.63; 5.75; 28.60; 16.94; 6.44; 3.08; 5.09;...
? ? -0.58; 3.24; 13.06; 10.80; 9.47; 13.36; 2.95; 3.63; 1.70; 1.78;];


% Source: Individual Search Results
DT = [DT; datetime(2020,07,01); datetime(2021,04,01);...
? ? datetime(2021,11:12,01)'; datetime(2022,01:02,01)';];
Rate = [Rate; 5.29; 4.29; 4.91; 5.59; 6.01; 6.07;];
inflation = timetable(DT,Rate);
inflation = sortrows(inflation);


figure(); plot(inflation.DT,inflation.Rate,'-.r');
grid on; xlabel('Year'); ylabel('Rate'); title('Inflation in India');

        

The cost of the products you can buy today for x money will cost you higher based on the interest rates. Currently, Inflation is at a 6.07% rate. It must give more than 6.07% returns for a real return on your money. SBI Saving Bank Accounts are providing interest at 2.7%. Some of the other banks offer interest of around 3.5%. Do you see that keeping your money in the savings bank account gives you a negative return? Small Saving Schemes are popular Govt. backed schemes that provide assured returns with a sovereign guarantee. So what are popular Small Saving Schemes, and how do they compare to Inflation? Let's discuss one by one:

Public Provident Fund

% Source: https://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132
% Source: https://dailytools.in/PPFCalculator/Article/PPF_KT_PPFInterestRateHistory
DT = datetime({'01-04-1968';'01-04-1969';'01-04-1970';'01-04-1971';...
? ? '01-04-1972';'01-04-1973';'01-04-1974';'01-08-1974';'01-04-1975';...
? ? '01-04-1976';'01-04-1977';'01-04-1978';'01-04-1979';'01-04-1980';...
? ? '01-04-1981';'01-04-1982';'01-04-1983';'01-04-1984';'01-04-1985';...
? ? '01-04-1986';'01-04-1999';'15-01-2000';'01-03-2001';'01-03-2002';...
? ? '01-03-2003';'01-12-2011';'01-04-2012';'01-04-2013';'01-04-2016';...
? ? '01-10-2016';'01-04-2017';'01-07-2017';'01-01-2018';'01-10-2018';...
? ? '01-07-2019';'01-04-2020';'01-04-2022';});
Rate = [4.8;4.8;5;5;5;5.3;5.8;7;7;7;7.5;7.5;7.5;8;8.5;8.5;9;9.5;10;...
? ? 12;12;11;9.5;9;8;8.6;8.8;8.7;8.1;8;7.9;7.8;7.6;8;7.9;7.1;7.1];
ppf = timetable(DT,Rate);
figure(); hold on;? plot(ppf.DT,ppf.Rate,'-og');
plot(inflation.DT,inflation.Rate,'-.r');
xlim([ppf.DT(1),ppf.DT(end)]);
grid on; xlabel('Year'); ylabel('Rate');
legend('PPF','Inflation'); title('PPF & Inflation since 1968');
        

The Public Provident Fund (PPF) is a long-term savings instrument established by the Central Government. It offers tax benefits on contributions as well as withdrawals after the lock-in period. This scheme came into force on July 1, 1968, and is backed by the government with the objective of providing old-age income security to the self-employed and those working in the unorganised sector. Though the scheme is voluntary, assured returns and income-tax benefits have fuelled its popularity. Savings in this product are completely risk-free because of government backing. The PPF is liquid, despite the 15-year lock-in stipulated with this account. Liquidity is offered in the form of loans against the PPF from the third year and withdrawals subject to certain conditions. In a financial year, one withdrawal of up to 50 per cent of the balance at the end of the fourth preceding year or at the end of the preceding year, whichever is lower, can be made. However, this withdrawal can be made from seventh year onwards only. The scheme has exempt-exempt-exempt (EEE) status, where the deposits, the interest earned as well as the maturity amount are tax-free. The sum invested in the PPF account is eligible for tax deduction under Section 80C subject to a maximum of Rs 1.5 lakh in a financial year. On maturity the entire amount including the interest is tax free.

Sukanya Samriddhi Yojana

% Source: https://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132
% Source: https://freefincal.com/sukanya-samriddhi-yojana-interest-rate-history-2015-to-present/
DT = datetime({'01-01-2015';'01-04-2015';});
DT = [DT; datetime(2016,4:3:10,1)';datetime(2017,1:3:10,1)';...
? ? datetime(2018,1:3:10,1)';datetime(2019,1:3:10,1)';...
? ? datetime(2020,1:3:10,1)';datetime(2021,1:3:10,1)';datetime(2022,1:3:4,1)';];
Rate = [9.1;9.2;8.6;8.6;8.5;8.5;8.4;8.3;8.3;8.1;8.1;8.1;8.5;8.5;8.5;...
? ? 8.4;8.4;8.4;ones(9,1)*7.6;];


ssy = timetable(DT,Rate);
ssy = sortrows(ssy);


figure(); hold on;? plot(ssy.DT,ssy.Rate,'-oc');
plot(inflation.DT,inflation.Rate,'-.r');
xlim([ssy.DT(1),ssy.DT(end)]);
grid on; xlabel('Year'); ylabel('Rate');
legend('SSY','Inflation'); title('SSY & Inflation since 2015');
        

Sukanya Samriddhi Yojana (SSY) is a tax-free small savings scheme for the girl child. It was launched on January 22, 2015. The parents or legal guardians of a girl aged upto ten years can open a Sukanya Samriddhi Yojana account in the name of the girl child in designated branches of public-sector banks or in a post office, with a minimum amount of Rs 250. It is a special initiative for the girl child and aims to encourage saving for her welfare. The depositor can open only one account in the name of one girl child and a maximum of two accounts in the name of two different children. However, the guardian can open the third account in the case of the birth of twin girls in the second birth, or girl triplets in the first birth. Sukanya Samriddhi Yojana account has a tenure of 21 years. However, partial withdrawal and pre-mature closure is allowed in case of higher education, marriage or on compassionate grounds. The scheme comes under the exempt-exempt-exempt (EEE) category, where the deposits, the interest earned as well as the maturity amount are tax-free. The sum invested in the Sukanya Samriddhi Yojana scheme is eligible for tax deduction under Section 80C subject to a maximum of Rs 1.5 lakh per year. On maturity, the entire amount, including the interest, is tax free.

Senior Citizens Savings Scheme

% Source: https://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132
% Source: https://groww.in/p/savings-schemes/scss-interest-rate
DT = [datetime(2003:2011,4,1)';datetime(2012:2013,4,1)';...
? ? datetime(2015:2017,4,1)'; datetime(2018,[1,7,10],1)';...
? ? datetime(2019,1:3:10,1)';datetime(2020,1:3:10,1)';...
? ? datetime(2021,1:3:10,1)';datetime(2022,1:3:4,1)';];
Rate = [ones(9,1)*9;9.2;9.3;9.3;8.4;8.7;8.3;8.3;...
? ? 8.6;8.7;8.7;8.6;8.6;8.6;ones(9,1)*7.4;];
scss = timetable(DT,Rate);
scss = sortrows(scss);


figure(); hold on;? plot(scss.DT,scss.Rate,'-ob');
plot(inflation.DT,inflation.Rate,'-.r');
xlim([scss.DT(1),scss.DT(end)]);
grid on; xlabel('Year'); ylabel('Rate');
legend('SCSS','Inflation'); title('SCSS & Inflation since 2003');
        

While retirement often comes with financial uncertainty, there are savings products that are safe and ensure guaranteed retirement income. The Senior Citizen Savings Scheme (SCSS), launched in 2004, is one such deposit scheme. Introduced by the Government of India, the main objective of the SCSS is to provide an assured return (paid every quarter) to senior citizens, and in doing so to create a guaranteed regular income flow. The SCSS is liquid, despite the five-year lock-in. One can make withdrawals subject to conditions and penalties. The sum invested in the SCSS on or after April 1, 2007, is eligible for tax deduction under Section 80C of the Income Tax Act. However, the interest earned on the deposit is fully taxable and tax is deducted at source (TDS) if the total interest in a year is above Rs 50,000. However, if the income is not taxable, one has to provide Form 15H or Form 15G so that no tax is deducted at the source.

National Savings Certificate

% Source: https://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132
DT = [datetime(1990:2010,4,1)'; datetime(2011,12,01);datetime(2012:2015,4,1)';...
? ? datetime(2016,4:3:10,1)';datetime(2017,1:3:10,1)';datetime(2018,1:3:10,1)';...
? ? datetime(2019,1:3:10,1)';datetime(2020,1:3:10,1)';datetime(2021,1:3:10,1)';...
? ? datetime(2022,1:3:4,1)';];
Rate = [12;12;12;12;12;12;12;12;11.50;11;9.50;9;8;8;8;8;8;8;8;8;8;...
? ? 8.4;8.6;8.5;8.5;8.5;8.1;8.1;8.0;8.0;7.9;7.8;7.8;7.6;7.6;7.6;8.0;8.0;...
? ? 8.0;7.9;7.9;7.9;6.8;6.8;6.8;6.8;6.8;6.8;6.8;6.8;6.8;];
nsc = timetable(DT,Rate);
nsc = sortrows(nsc);


figure(); hold on;? plot(nsc.DT,nsc.Rate,'-ok');
plot(inflation.DT,inflation.Rate,'-.r');
xlim([nsc.DT(1),nsc.DT(end)]);
grid on; xlabel('Year'); ylabel('Rate');
legend('NSC','Inflation'); title('NSC & Inflation since 1990');

        

The National Savings Certificate (NSC) is a popular and safe small-savings instrument that combines tax savings with guaranteed returns. This scheme is backed by the government and is available at post offices. The distribution reach of India Post is responsible for the popularity of this instrument. The main objective of investing in the NSC is to avail tax deduction on deposits and guaranteed returns on investment. Liquidity in the NSC is available in the form of loans since you can borrow against your NSC savings. The sum invested in the NSC is eligible for tax deduction under Section 80C up to the Rs 1.5 lakh limit stipulated in a financial year, including the accrued interest on the existing certificates. Since the interest earned on the NSC is automatically reinvested, it can be claimed as a?deduction under Section 80C. But if the accrued interest is not added to the Rs 1.5 lakh deduction under Section 80C, then the entire income is taxable on maturity.

Kisan Vikas Patra

% Source: https://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132
DT = [datetime(1990:2010,4,1)';datetime(2014:2015,4,1)';...
? ? datetime(2016,4:3:10,1)';datetime(2017,1:3:10,1)';datetime(2018,1:3:10,1)';...
? ? datetime(2019,1:3:10,1)';datetime(2020,1:3:10,1)';datetime(2021,1:3:10,1)';...
? ? datetime(2022,1:3:4,1)';];
Rate = [14.87;14.87;14.87;13.43;13.43;13.43;13.43;13.43;12.25;11.25;...
? ? 10.03;9.46;8.41;8.41;8.41;8.41;8.41;8.41;8.41;8.41;8.41;8.7;8.7; 7.8;...
? ? 7.8;7.7;7.7;7.6;7.5;7.5;7.3;7.3;7.3;7.7;7.7;7.7;7.6;7.6;7.6;6.9;6.9;...
? ? 6.9;6.9;6.9;6.9;6.9;6.9;6.9;];
kvp = timetable(DT,Rate); kvp = sortrows(kvp);


figure(); hold on;? plot(kvp.DT,kvp.Rate,'-om');
plot(inflation.DT,inflation.Rate,'-.r');
xlim([kvp.DT(1),kvp.DT(end)]);
grid on; xlabel('Year'); ylabel('Rate');
legend('KVP','Inflation'); title('KVP & Inflation since 1990');

        

The Kisan Vikas Patra (KVP) is a popular and safe small-savings instrument that doubles the invested money in 9 years and 3 months. This scheme is backed by the government. After withdrawing it, the government relaunched it on November 18, 2014. The money raised through the KVP is used in the welfare schemes for farmers. The KVP is liquid. Liquidity is offered in the form of loans and withdrawals subject to conditions. The minimum lock-in period is 30 months, after which one can encash it. Also, it can be transferred from one person to another any number of times.?The facility of pledging the KVP to borrow is allowed and one can take loans against the KVP from banks and financial institutions. Premature closure of the KVP is permitted wherein a pre-fixed value of the KVP is paid as indicated in the table. For the existing investors, there is no tax benefit on the deposit or the interest that the KVP earns. There is no tax deducted at source.

Comparison of all saving schemes together with Inflation

figure(); hold on;
plot(ppf.DT,ppf.Rate,'-og');
plot(ssy.DT,ssy.Rate,'-oc');
plot(scss.DT,scss.Rate,'-ob');
plot(nsc.DT,nsc.Rate,'-ok');
plot(kvp.DT,kvp.Rate,'-om');
plot(inflation.DT,inflation.Rate,'-.r');
grid on; xlabel('Year'); ylabel('Rate');
legend('PPF','SSY','SCSS','NSC','KVP','Inflation');?
xlim([ssy.DT(1),ssy.DT(end)]);
title('All Saving Scheme vs Inflation since 2015');
        

All these Small Saving Schemes give real returns, i.e., Inflation-Adjusted Returns. Depending on the scheme in which you are eligible or block your money for the least period, you should go with. Those who can accept Equity volatility should think about Stock Market or Mutual Funds. This article aims to increase awareness for education and research purposes and is not a piece of financial advice. Do your own research before making any investments.

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