General saving principles and ‘Saving’ in National (Small) Savings Schemes: An Overview

By: Rojendrakar Nongthomba (MFS)
Rational Principle of Consumption and Saving:
At the outset, itmay be useful to understand the concept of consumption demand. Consumption demand indicates the quantities of a good (or service) which the household would be willing and financially able to purchase at various prices, other things remaining the same also known as “ceteris paribus” (a Latin phrase). This conditional phrase is so important that demand (or consumption demand in our case) would refer to the entire relationship between price and quantity as long as other things remain the same. However, in real life, consumption demand is not only determined by the price of the commodity itself (own price) but by other factors also. Some other factors are:
1. Change in prices of other goods e.g. an increase in the price of heating oil results in an increase in the demand for natural gas.
2. Changes in income: a rise in the consumer’s income raises the demand for a commodity.
3. Changes in tastes&preferences e.g., Americans, imitating the British, start drinking tea more often or when one switches from plain clothes to designer clothes.
4. Changes in weather e.g., demand for ice cream keeps rising on sunny days.
5. Changes in expectations: it may include, inter alia, future uncertainties/exigencies, speculation.
As we go towards saving, we may study income-consumption relationship. When income increases, consumption also increases but by less than the increase in income. This is called APC (average propensity to consume). In other words, income consumption relationship is non-proportional. It implies that the entire increase in income is not spent on consumption only; the remaining is saved. So, the increased income will be divided in some proportion between consumption expenditure and saving. To understand the concept of saving better,we may, here, mention the two types of consumption i.e.1. Autonomous Consumption and 2. Induced Consumption. Autonomous consumption may simply be understood as expenditure taking place when disposable income levels are at zero. This expenditure isused to fund consumer necessities, thereby causing consumers to borrow money or withdraw from savings account (i.e., dissaving). This type of consumption is independent of the level of one’s incomei.e. it is not related to the level of income one earns. Even if a person is broke, he still has basic needs like food, shelter, utilities, health care, and transportation. When a consumer is in this situation, he is forced to spend more money than he earns, resulting in dissaving. And Induced Consumption is the portion of consumption that varies directly with disposable income i.e.a change in disposable income induces a change in consumption on goods and services.The amount spent on autonomous consumption may be different from person to person.However, when one is faced with a situation of ‘dissaving’ it is quite commonsensical to minimize one’s expenditures so that one would avoid resorting to heavy borrowings at exorbitant interest rates especially from the non-institutionalized money lenders or liquidation of one’s assets for meeting his expenditures on autonomous consumption. And it will also be logical if one takes the immediate corrective action to come out of such a situation as quickly as possible by applying commonsense knowledge of accounting and skills of financial management.
Savings can be viewed as a buffer stock; added to when times are good in order to maintain consumption when times are bad. Yes, it’s true that when income increases, consumption also increases but by less than the increase in income. Because in a normal circumstance, a rational man never spends/exhausts his disposable income indiscriminately as if the end of the world is imminent in the next few days.As said above, in a normal situation, average propensity to save of an individual household increases when its income increases,but by less than the increase in income. Obviously, increased income is divided in some proportion between consumption expenditure and saving. Thus, income saved by the individual households is normally invested in many investment instruments. However, many a time people either due to lack of education and knowledge or intentionally take anomalous decisionsin regard to consumption of certain goods and services. Very often, we come across instances of individual tastes and preferences influenced by the prevailing environments such as advertisements and fashions and intention of imitating others. For instance, a daily wage earner may decide to send his or her child to a costly reputed privateschool rather than sending to a reputable government-run school, where school uniform, books etc are provided free of cost up toa certain standard, just because his neighbors are sending their wards tothe private school. He simply wants to follow what others are doing no matter whether he can afford doing so.And in the process, he ends up with spending more than what he earns and as a result, when he runsa deficit, he curses his fate for the wrong decision he had taken.Such paradoxical behavior of individual which is termed as Demonstration Effect in economics should never be encouraged. In money matters, it is always better to listen to your brain than to your heart.
It is very obvious that Government frames economic and financial policies and programmes for improvement/upliftment economic and social conditions of the average citizens of the country. However, since the resources are limited it has to distribute/allocate its resources in different sectors of the economy in such a judicious manner that the needs of different sections of the society are met at the maximum level. And while doing so it has to strike a balance between the current requirement for meeting social and public welfare priorities and the requirement for investment in those sectors of economy that will bring about socio-economic goals of the country in the long run. In a similar way, a common man has to allocate his wealth (resources) judiciously among different needs. An individual may have numerous wants /needs. But as every one of us may not have the means (i.e. wealth,) to procure everything at one time, there comes the necessity of economizing one’s resources and prioritizing consumption of goods and services. And what is expected of a rational man is that if compelled by the circumstances, he should be able to readily compromise his level of utility that is drawn from consumption of a certain set of goods and services.From the simple discussion above, it is believed, one mayhave learnt the complex relation that exists between income (resources), and saving and consumption patternsand accordingly, one would always keep the importance of saving in mind while one makes expenditure out of one’s disposable income.
Asset allocation and Diversification as a way of risk management:
Whenever a person undertakes investment, his investment portfolio should be designed in such a way it has good mix of all types of asset classes so that risk of big fluctuations/volatility in returns from these asset classes in totality is minimized. Asset allocationmeans provision ofdifferent ‘investment asset classes’ in one’sinvestmentportfolio or asset portfolio and while diversification of assets means owning a variety of investment types within a particular asset class. For example, one may, in his investment portfolio, allocate his investment in the different asset categoriessay bond and equity and within the category of ‘Bond’ he may diversify his investment in the form of ‘corporate’ and ‘government’ bonds. Such management of portfolio of wealth will surely minimize risk and maximize returns on the investments, individuals make in various such investment opportunitiesas equity, debt, precious metals, real estate as the different asset classes react differently to the economic upheavals. Investors choose and pick the investment financial instruments after factoring in considerations of income (rate of interest and periodicity of interest), safety and liquidity(including interest and credit risks), long and short term returns and also the tenure of the investments i.e. emergency funds and short term financial goals etc. It may also be mentioned that Investors who keep abreast with latest situations of political and financial and economic scenarios (both domestic and global) do well in wealth or asset management because many would not want to invest in the risky assets. During war like situationsmany would prefer safe investment like gold over other investment assets.The art and science of asset allocation and distribution need to be thoroughly mastered before one makes investments.Financial investment options areabound and one needs to have a sound knowledge of money and capital markets (stock bourses) and functioningof overall financial system of the country. Some of the investment options are Equity, Bonds, Gold, Mutual Funds, Fixed Deposits, Index Funds, Exchange Traded Funds, Real Estate and REITs (Real Estate Investment Trusts), Insurance Plans, National Small Savings Schemes and out of these, investors can, after proper analysis of merits/demerits of each of these investment options, pick the instrument/s which suit his or her requirement the most. Both for trading and investment in stocks and other investment instruments which are listed in the Stock Exchanges, one needs to open Demat Account. Now even the retail investors can directly buy and sell the government bonds (G-Securities) by opening Retail Direct Gilt (RDG) Account with the Reserve Bank of India.
National (Small) Saving Schemes: why should one invest in them?
The National (small) Savings Schemes are one of the safest and most secured instruments of saving. They are products of Ministry of Finance, GoI (Government of India) hence, these fixed income investments are backed by the sovereign guarantee. The rates of interests are attractive compared to other similar instruments and schemes available in the financial markets. The gains/returns of these instruments are not influenced by market volatility.They are basically debt instruments.By investing in these instruments, people are also indirectly participating in the process of nation building. These instruments have certain lock-in-periods and some of the schemes offer income tax exemptions in respect of interests earnedand rebate in many cases.The schemes are structured in such a way to cater to the needs of different sections of the Society, especially the lower and middle class sections of the society. It may therefore be safely said that for the middle- and lower-income groups who are risk adverse and do not want exposure to risks and at the same time getting regular reasonable returns in their investment of their hard-earned money without getting any tension of losing their money, these schemes are the most suitable investment options.Apart from branches of Post Offices,account for some schemes such as NSC, SCSS, SSA and PPF can also be opened at certain designated banks (both nationalized and private banks)
A brief discussion of 9 (nine) National (Small) Savings Schemes is given below and, since accounts (schemes) are need-based, one can pick and invest in the schemes as per one’s requirements subject to fulfilling the eligibility criteria.
1. Post Office Savings Account:
· Account can be opened with minimum Rs.500 and there is no maximum limit for deposit of amount in the account.
· A minor above 10 years can open account in his own name.
· Interest @4% per annum (upto for the quarter ending 31st March 2022) on single and joint accounts.
· Subsequent deposit should not be less than Rs.10 and
· Rs.50. is the Minimum withdrawal amount.
· Rs. 3,500 tax exemption for single post office savings account and Rs.7000 in case of joint account holders is an additional benefit that one can claim in one’s ITR after claiming  Rs. 10,000 deduction available under Section 80 TTA of the income tax act.
· Account may be treated as dormant/silent if no transaction for three financial years but can be revived.
2. National Savings Recurring Deposits account:
· Its maturity period is 5 Years.
· Interest rate is 5.8% per annum (currently upto for the quarter ending 31st March 2022). Compounding is done quarterly.
· Minimum of Rs.100 per month or any amount in multiples of Rs.10.
· Maximum no limit.
· Deposit is to be done between 1& 15th of every month and account opened after that before end of month
· Default charge of Rs.1 per 100 rupeedenominations after four defaults account becomes discontinued.
· Any number of accounts can be opened. (Joint or single)
· Six and twelve months’advance deposits earn rebate at a prescribed rates.
· Loan: After 12 installments and account is continued for 1 year, loan upto 50% of the credit balance at the account can be availed.
· Loan interest(2%+RD interest)
· Premature closure allowed subject to conditions.
· Can be closed after three years from the date of opening the account.(Post Office Saving interest).
· Can also be extended after maturity with/without deposit.(for further five years)
3. National Savings Time Deposit account:
· Maturity periods are 1,2,3,5 years. Minimum of Rs.1000/- and in multiples of Rs. 100. No maximum Limit. (Single or joint).
· Current interest rates for 1 yr, 2 yr and 3yr accounts are 5.5% and for 5yr is 6.7%.( till quarter ending 31st March 2022)
· Any number of Accounts can be opened.
· Interest calculated in quarterly basis and payable annually.
· Tax rebate under 80-C of IT Act.is available in 5 year TD account.
· Account can be extended. And the interest rate applicable to respective TD account on the day of maturity shall be applicable to the extended period.
· On premature closure before 1 year PO Savings Account rate shall be applicable.
4. National Savings (Monthly Income Account) Scheme:
· Maturity period is 5 years. Minimum of Rs.1000/-and in the multiple thereof.Maximum of Rs.4.5 lakhs in a single account and Rs.9 lakhs in Joint.
· Current interest rate is 6.6 % per annum and interest is paid every month.
· Can be prematurely (subject to conditions) closed after completion of one year from date of opening account.
5. Senior Citizens Savings Scheme (SCSS):
· Maturity period is five years. Minimum of Rs.1000/- & in the multiples thereof with maximum of Rs.15 lakhs.
· Interest rate is 7.4% per annum (till 31st march 2022) and interest is payable quarterly.
· Persons who have attained 60 years of age can open.
· Person who retired under VRS if attained 55 years or above but less than 60 can open
· Retired personnel of Defence Services can open irrespective of age limit subject to fulfillment of other specified conditions.
· Account can be opened jointly with spouse only
· Account can be extended on maturity for3 years(within 1 year from the date of maturity)
· Income tax rebate under section 80C of IT Act is available
· Interest is taxable if it exceeds 50,000/- in a financial year and TDS is done at the prescribed rate. However, if relevant form H is submitted then it will be deducted as the income is less than the income table slab.
6. National Saving Certificate (NSC) (VIII Issue):
· 5 years is its maturity period.Minimum of Rs.1000/-&in multiples of rs.100 &no maximum limit
· Account can be single or joint.
· Current interest rate is 6.8% compounded annually but payable at maturity.
· Tax rebate under 80C of IT Act is available.
· Any number of Accounts can be opened.
7. Kisan Vikas Patra (KVP):
· Minimum of Rs.1000/- and in multiples of Rs.100&no maximum limit.
· Can be open single or joint.
· Any number of accounts can be open.
· Current interest rate is 6.9% and compounded annually.
· Money doubles on maturity.
· At the current rate the money doubles in 124 months.
8. Public Provident Fund Scheme (PPF):
· 15 years is its maturity period. Minimum of Rs.500/-.&maximum of Rs.150000/-in a FY.
· Single account can be opened.
· Deposits can be made in lump sum or in installments.
· Current interest rate is 7.1% per annum(compounded annually)
· Tax free interest.Income tax rebate under Section 80C of IT Act.is available.
· Facility of withdrawal and loan is available after prescribed period.
· Account can be extended in block period of five years.
· Loan after expiry of one year (25%)
9. Suknya Samridhi Account (SSA):
· 21 years is its maturity period.Minimum of Rs.250/-.&maximum of 150000/-in a FY.
· Interest rate is 7.6% per annum ,calculated yearly basis (compounded annually)
· Tax free interest. Income tax rebate under 80C of IT Act.is available.
· Deposit can be made maximum up to completion of 15 years from the date of opening.
· 50% balance can be withdrawn for higher education after attaining of age of 18 years or passing of tenth standard, whichever is earlier.
· Eligible upto two girl children below the age of 10 years.
· Interest earned is tax free
· Scheme was launched as part of ‘beti bachao beti pardhao’ campaign
(The writer is a Director, Small Savings, Manipur)