A Birds Eye View on NSC, MIS, KVP and Senior Citizen Savings Scheme
When it comes to investing the riskier the asset class, the more lured we are to invest in it for higher returns but every rational investor should be prudent enough to invest some proportion of their savings in risk free investments to balance the risk undertaken by them and stabilize their returns. The percentage of total investments that an individual should invest should depend on his risk appetite, time horizon, age, life goals and liquidity requirements. (To know more about asset allocation read detailed articles in the financial planning section of this blog.)
Most of us our already acquainted with Fixed and Recurring Deposits offered by banks. In this article we are going to discuss about some of the lesser known safe investment options available in India and the various benefits they offer. In this Part I of this article we will discuss about NSC, KVP, MIS and SCSS. But before we get into the details about each scheme here are some of the parameters that we should keep in mind while choosing which scheme suits us.
CAGR – Compounded annual growth rate gives us the rate of compound interest that we have earned on an average annually over a period of time and it is calculated using the following formula-
(Final Value of Investment ÷ Initial Value of Investment)1/period of investment – 1
Different schemes calculate interest in different ways and a scheme giving 8% interest compounded quarterly (CAGR – 8.24%) is actually giving more interest than a scheme giving 8.20% compounded yearly (CAGR – 8.20%) though it may seem the other way round at face value. CAGR helps us compare return of different schemes.
Liquidity – Most of our assets like the house we own, long term bonds etc are not readily convertible to cash in times of crisis. Thus we should keep in mind our liquidity requirements while choosing our mode of investment. We can analyze the liquidity of a scheme by checking the duration of the lock in period and the frequency of payouts by the scheme. We should also check whether it is possible to withdraw some amount during this lock in period on any emergency, and if allowed then how much is the penalty for that.
Flexibility – We all have certain financial goals and while investing we should see to it that the plans we invest in suit our needs. We should check the minimum and the maximum investment limits and whether the pattern of inflows and outflows the instrument can generate can be customized according to our requirements.
Special Benefits – If you pay a lot of taxes and want to save some or if you want a means of regular monthly income or any other specific benefit go for relevant schemes that offer those.
The table below shows how the following schemes comparatively perform according to the above mentioned parameters. However to take investment decisions read the next section given below the table where each scheme is discussed vividly. Note that the rates have been updated according to the new rates applicable from 1st April 2016.
| Scheme | CAGR (%) | Liquidity | Special Benefits | |
| Lock in period | Withdrawal within lock in period without penalty | |||
| NSC VIII | 8.10% | 5 years |
× |
Tax Savings |
| KVP | 7.80% (only if invested for full 9 yrs 2 months) | 2 yr 6 month |
× |
– |
| MIS | N.A.
(S.I. 7.80%) |
5 years |
× |
Monthly Interest Income |
| SCSS | N.A.
(S.I. 8.60%) |
5 years |
× |
For Senior Citizens – monthly income + tax savings |
National Savings Certificate (NSC)
Whom is it applicable for: Individuals (HUF and Trusts are not eligible)
Where to buy from: This scheme can be purchased from any Post Office. Forms can be downloaded from the website the link to which is given below-
Investment required: A one-time investment of a minimum of Rs 100 is done. There is no maximum limit.
Lock in Period: Earlier there were two variants, NSC VIII having a lock in period of 5 years and NSC IX having a lock in period of 10 years. But now the NSC IX scheme has been discontinued. No interest is paid in cash during the lock in period and the entire amount along with the cumulative interest is paid together on maturity.
Rate of Return: According to the scheme Rs 100 invested in NSC VIII grows to Rs 147.61 after 5 years at effective rate of interest of 8.1% compounded half yearly.
Tax Benefits: Deposits in the scheme entitles the depositor to get a deduction in taxable income to the extent of the amount invested subject to a maximum of Rs 1,50,000 in a financial year u/s 80C of the IT Act. The interest accrued in any particular year is taxable in that year under the head Income from Other Sources but eligible for deduction u/s 80C within the maximum limit stated above.
Other Benefits: They can be kept as collateral security for getting loans from banks.
CAGR: It is 8.10% for NSC VIII scheme.
Withdrawals and Premature Withdrawals: Withdrawals are not allowed. Premature withdrawal is only allowed in case of death, forfeiture pledge and court order and in these cases also withdrawal is done at a lower rate than that initially promised.
Flexibility of investing: Since these are simple one time investment and one time withdrawal schemes you can make a customized plan for yourself to suit your needs. For example, you may invest Rs 8,000 every month i.e. Rs 96,000 every year for 8 years in NSC VIII. Keeping the total investment below Rs 1,50,000 in any given year would let you get full deduction though even if your investment is more than that you will still earn interest without tax benefits.
| Year | Outflow in the Beginning of the year |
Total Interest accrued at year end |
Deduction for tax | Cash Inflows in the end of the year |
| 1st Year | 96,000.00 | 7,776.00 | 103,776.00 | – |
| 2nd Year | 96,000.00 | 16,181.86 | 112,181.86 | – |
| 3rd Year | 96,000.00 | 25,268.59 | 121,268.59 | – |
| 4th Year | 96,000.00 | 35,091.34 | 131,091.34 | – |
| 5th Year | 96,000.00 | 45,709.74 | 141,709.74 | 141,709.74 |
| 6th Year | 96,000.00 | 45,709.74 | 141,709.74 | 141,709.74 |
| 7th Year | 96,000.00 | 45,709.74 | 141,709.74 | 141,709.74 |
| 8th Year | 96,000.00 | 45,709.74 | 141,709.74 | 141,709.74 |
| 9th Year | – | 37,933.74 | 37,933.74 | 141,709.74 |
| 10th Year | – | 29,527.88 | 29,527.88 | 141,709.74 |
| 11th Year | – | 20,441.15 | 20,441.15 | 141,709.74 |
| 12th Year | – | 10,618.40 | 141,709.74 | |
| Total | 768,000.00 | 1,123,059.53 | 1,133,677.92 |
Thus, through the above table we can easily see that by investing Rs 96,000 yearly (i.e. Rs 8,000 per month) for 8 years systematically we can get Rs 11,33,678 i.e. Rs 1,41,710 yearly (i.e. Rs 11,809 per month) for 8 years and additionally a cumulative tax savings of Rs 1,12,306 (assuming 10% tax slab). This means that had we not invested in this scheme and our amount invested was otherwise taxable we would have spent Rs 1,12,306 more to pay taxes. Note that the final year interest is taxable. This is because it cannot be deemed as reinvested into the scheme and does not qualify for deduction under 80C as the whole investment matures.
Kisan Vikas Patra (KVP)
Whom is it applicable for: Individuals
Where to buy from: This scheme can be purchased from any Post Office.
Investment required: Investments have to be made in denominations of Rs 1,000, 5,000, 10,000 and 50,000. Minimum investment is Rs 1,000 and there is no maximum limit.
Lock in Period: 2 years 6 months
Rate of Return: Rate of Interest is 7.80% compounded annually and Investment doubles if invested for the full tenure of 9 years 2 months (i.e. 110 months) however if withdrawn after the lock in period and before 110 months then lower rate of interests are given.
Tax Benefits: No tax benefits on money invested. Interest is also taxable.
Other Benefits: They can be kept as collateral security for getting loans from banks.
CAGR: 7.80% if kept for full period (110 months)
Withdrawals and Premature Withdrawals: After lock in period of 30 months (2 yr 6 months) you can withdraw every six months. However it will fetch you a lower rate of interest.
Flexibility of investing: This scheme has no tax benefits. It gives the flexibility of investing and also of withdrawing after 30 months however you are entitled to get the interest rate promised only if you invest for full period of 100 months.
Monthly Income Scheme (MIS)
Whom is it applicable for: Individuals
Where to buy from: This scheme can be purchased from any Post Office.
Investment required: Investments have to be made in multiples of 1500s and Maximum investment limit is Rs 4,50,000 in single account and Rs 9,00,000 in joint accounts (where individual share should not be more than Rs 4,50,000).
Lock in Period: 5 years
Rate of Return: Rate of Simple Interest (S.I.) is 7.80% p.a. payable monthly. So if you have invested Rs 4,50,000 in a year then you are entitled to get Rs 35,100 per year i.e. Rs 2,925 per month for five years and the principal on maturity. If you do not withdraw your interest then it will still not be added back to the capital for compounding i.e. you will not earn any interest on it.
Tax Benefits: No tax benefits on money invested. Interest is also taxable.
CAGR: Assuming we would have invested the same money in a compounding scheme and received principal with all the interest at maturity the CAGR would have been 6.80%, however this would not be a correct comparison as the utility of the scheme is to generate regular income before maturity.
Withdrawals and Premature Withdrawals: Interest is withdrawn every month. We can prematurely withdraw the principal after one year but before 3 years of the investment with the deduction of 2% of the deposit and after 3 years with the deduction of 1% of the deposit.
Flexibility of investing: An individual can open more than one MIS accounts but the maximum limit for an individual is still Rs 4,50,000 by adding balance of all the accounts. This is pretty much limited and the scheme does not even offer any tax benefits. It can generate a maximum of Rs 2,925 in interest per month for one individual.
Senior Citizen Savings Scheme (SCSS)
Whom is it applicable for: (i) Senior Citizens (6 years and above); (ii)Individuals of 55 years of age or more who have retired on superannuation or VRS and open account within one month of receipt of retirement proceeds. A joint account may also be opened with spouse where only one of the applicants is required to attain the qualifying age.
Where to buy from: This scheme can be purchased from any Post Office and selected banks.
Investment required: A one-time investment is made in this scheme. The minimum amount of investment required is Rs 1,000 and the maximum amount is lower of retirement benefits received and Rs 15,00,000. An individual can open more than one account but his cumulative amount adding the balances of all his accounts in this scheme should not exceed the maximum limit.
Lock in Period: 5 years extendable for 3 more years.
Rate of Return: Rate of Simple Interest (S.I.) is 8.60% p.a. payable quarterly (31st March/ 30th June/ 30th September and 31st December). If you do not withdraw your interest then it will still not be added back to the capital for compounding i.e. you will not earn any interest on it.
Tax Benefits: Amount deposited in this scheme is eligible for tax deduction under section 80C within the limit of section 80C i.e. Rs 1,50,000 per annum. Interest paid quarterly is taxable. TDS (Tax Deducted at Source) is deducted at 10% if the amount of interest exceeds Rs 10,000 in any financial year.
CAGR: Assuming we would have invested the same money in a compounding scheme and received principal with all the interest at maturity the CAGR would have been 7.42%, however this would not be a correct comparison as the utility of the scheme is to generate regular income to senior citizens before the maturity of the scheme.
Withdrawals and Premature Withdrawals: Interest is withdrawn every quarter. We can prematurely withdraw the principal after one year but before 2 years of the investment with the deduction of 1.5% of the deposit and after 2 years with the deduction of 1% of the deposit. However during the extended period, after expiry of 1 year from extension the entire amount can be withdrawn without any deduction.
Flexibility of investing: This scheme is very similar to MIS but is customized for senior citizens and has added advantages like higher interest rates and tax benefits. The limit of Rs 15,00,000 is a bit limiting as it pertains to retirement. It is ideal for senior citizens to invest some proportion in this safer option and get the tax benefits but they should also plan and invest in other schemes and asset classes to completely cover themselves.
Note 1: In the Part II of this article we will discuss Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and also compare PPF with SSY.
Note 2: The interest rates and tax rules mentioned have been updated in this article for Financial Year 2016-2017.
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