By Satish Singh
Today the population of the country is about 121 crores, out of which 83.3 crores people live in rural areas, which is 69 percent of the total population. 37.7 million people live in urban areas, which is 31 percent of the total population. The literacy rate of women in rural areas is 50.6 percent, while in urban areas the rate is 76.9 percent. At the same time, the literacy rate of men in rural areas is 74.1 percent, while in cities it is 88.3 percent.
It is clear from these figures, still a large population of the country does not understand investment. Most people still invest in banks, post offices, public provident fund, Sukanya Samriddhi Yojana, Kisan Vikas Patra, National Savings Letter etc., as these are safe and attractive options for investment. They do not understand the intricacies of the stock market. According to an estimate, only 2.78 crore Indians invest in the stock markets, which is just 2 percent of the country’s population. Even in developed countries, the situation is not very good. For example, still only 50 percent of Americans prefer to invest in the stock market.
The National Savings Paper (NSC), Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) are the most popular deposit schemes among retail investors, as they yield the highest return on investment. At present, interest is being given on NSC at the rate of 6.8 percent on an annual basis, while interest is being given at maximum rate of 5 to 6.5 percent in banks. If investors are depositing income tax under the old system of income tax, then they can get more benefit from NSC, because under the old system, investing in NSC up to a maximum of 1.5 lakh rupees gives income tax exemption.
In PPF, interest is given on an annual basis at the rate of 7.1 percent. For investing in PPF, interest is paid on the entire deposit instead of the investment made in any quarter or financial year. Not only this, under Section 80C of Income Tax on the amount deposited in PPF, income tax exemption is also given on investment. Also, on completion of the maturity period, which is 15 years, there is no income tax on the matured amount. Thus, like NSC, PPF becomes even more profitable for investors due to income tax exemption.
If someone has a girl child below 10 years of age, then they can open SSY account in the bank. Under this scheme interest is paid at the rate of 7.6 percent, which is calculated on an annual basis. Its duration is 15 years from the date of opening the account or till age of the daughter reach at 21 years. In this scheme also, income tax is exempted according to the Income Tax Act and there is no income tax on the maturity amount. The exemption in income tax under the Income Tax Act increases the percentage of benefit from Sukanya Samriddhi Yojana.
The post office savings scheme offers interest at the rate of 4 percent, in which the interest is calculated on an annual basis. Interest is paid on post office fixed deposits at the rate of 5.5 percent for 1 year to 3 years, whereas from the rate of 6.7 percent for 5 years period. Interest is calculated on a quarterly basis. At the same time, interest is given at the rate of 5.8 percent on the post office frequency deposit scheme of five years, which is also calculated on a quarterly basis. In the preferred citizen deposit scheme, interest is calculated on quarterly basis at the rate of 7.4 percent, while in post office monthly income scheme, interest is calculated on monthly basis at the rate of 6.6 percent. Interest on Kisan Vikas Patra (KVP) is calculated at the rate of 6.9 percent. The rate of interest is calculated on an annual basis
To promote savings at the national level, the National Savings Institute has been formed, which works under the Department of Economic Affairs, Ministry of Finance. The job of this institute is to encourage the public to invest in national savings schemes. For this, this institute works continuously to promote government schemes at the national level. Most people in India prefer to invest in government small savings schemes, as the government pays attractive interest on the money invested in these schemes and exempts income tax. Government Small Savings Schemes are operated through a vast network of post offices and government banks.
People invest in government small savings schemes, which are deposited in the National Small Savings Fund (NSSF). This amount is used by the central and state governments to meet their financial deficit and invest the remaining amount in government securities. During the financial year 2017-18, the people of the country invested a total of Rs 5,96.402 lakh crore in government small savings schemes. Obviously, due to the high interest rate of small saving schemes, the government is paying more interest to investors on their deposits, but it is earning less from the deposit amount. Due to this, the government is unable to maintain fiscal balance during the Corona period. For this reason, interest rates on government small savings schemes were cut by 1.1 percent on 31st March. This decision had been taken for the first quarter of 2021-22, which had started on 1st April. However, the government later had to back down from its decision.
According to the most up-to-date data available on the National Savings Institute website as of November 2018, the people of West Bengal have invested the most in government small schemes. At the same time, people of 5 states, such as West Bengal, Kerala, Assam, Pondicherry, and Tamil Nadu, where assembly elections are being held, have invested 25 percent of the total investment in these government small schemes. Therefore, it is being speculated that after the assembly elections in the states are over, the government can again cut the interest rates of the government small savings schemes, because now cutting the interest rates can have a negative effect on the election result.
The corona pandemic has reduced the government’s revenue source, but it is also true that this epidemic has also reduced the income source of the public. It is clear from the data that in a big country like India, a large section of the country still likes to invest in government small savings schemes, because investing in these schemes keeps their investment safe and gives a certain return. United Nations Population Fund had released a report in 2019. As per this report, 8.16 crore people in India were above 65 years of age. If one percent of this population i.e. 8,16,000 elderly people invest in such schemes, they will have to face problem in sustaining their livelihood after cutting interest. Hence, the government should take these important facts into consideration before cutting the interest rates.
(Author is Chief Manager at State Bank of India, Mumbai and editor of “Aarthik Darpan” an in-house journal of SBI. Singh is also a freelance writer. The views expressed are personal opinion of the author. He can be reached at satish5249@gmail.com and singhsatish@sbi.co.in.)
