Wondering about the taxation of Post Office Saving schemes? While some Post Office schemes are heavily taxed, others can give you some tax breaks. Here’s a look.
Post office schemes have always been popular. Nothing much has changed even after post office rates got linked to debt market rates. If you didn’t know, post office savings scheme rates are now linked to Government security rates that are prevailing in the market. These rates will change every quarter based on how Government security rates change.
Despite post office schemes being market-linked and interest rates changing quarter on quarter, people continue to invest in these schemes. Obviously, the reason is sovereign guarantee. Post office investments are as safe as Government bonds. Another reason why people flock to post office schemes is that there is no tax deducted at source (TDS) for any of the Post Office (PO) schemes except the Senior Citizens Savings Scheme (SCSS). Of course, if you are a senior citizen, you can submit Form 15G/H, as applicable, to avoid TDS being deducted from your SCSS account.
Additional Reading: Understand Tax Deducted At Source
However, most people do not understand that interest income from some of these schemes can be lower than other investments due to taxation. This is because except for the Public Provident Fund (PPF), interest income from all other schemes is taxable. Even though the features of these schemes are good, the tax might be a disappointment. Want to know which schemes are the best? Read on to find out.
Monthly Income Scheme (MIS) – Just like you have Monthly Income Plans (MIP) for Mutual Funds, the post office also offers you such a scheme. The maturity period for this investment will be 5 years. The minimum investment is pegged at Rs. 1,500 and the maximum investment will be Rs. 4.5 lakh for a single account. The joint account which can be opened by two or three adults has a maximum investment limit of Rs. 9 lakh. The interest on your MIS can be withdrawn if you choose the auto credit option. Under this option, the interest from the post office MIS will be credited to your post office savings account. However, this interest income will be taxable. The current rate of interest for the post office MIS scheme is 7.3%. This is payable monthly. The post-tax yield on this scheme will work out to 5%. There are no tax rebates on the investment made in this scheme. Given this scenario, you can make better returns by investing in MIP schemes offered by Mutual Funds.
Additional Reading: Understanding Mutual Funds
Savings Account – This scheme is similar to your bank Savings Account. But the account can be opened by providing only cash. A cheque is not acceptable for an account opening. You can make deposits and withdrawals through electronic mode. You will get an ATM card if your post office is Central Banking Solution (CBS) enabled. The minimum amount needed to open an account is just Rs. 20. Interest on your post office savings account is totally tax-free up to Rs. 10,000 and the interest rate is fixed at 4% just like bank accounts. In the case of your bank savings account too, interest earned can be claimed as a tax deduction for up to Rs.10,000. Also, in the case of bank savings account for high net-worth individuals, banks do provide higher interest rates of 6%.
Senior Citizen Savings Scheme (SCSS) – You can open a post office SCSS account when you turn 60 years of age. The maturity period for the investment is 5 years. There is no limit to the number of accounts that you can open, subject to the maximum investment limit which is set at Rs. 15 lakh. Quarterly interest will be payable for this account and will be credited to your post office savings account. The current interest rate for SCSS is 8.7% per annum. The taxation provisions for SCSS are very similar to your bank tax saver FD. The interest rate on your SCSS will be taxable but you can use the investment amount as a deduction under Section 80C of the Income Tax Act. Note that SCSS interest will be subject to TDS if the interest income exceeds Rs. 40,000 in a financial year. So, post-tax return from your SCSS will be about 6% but if you consider the tax savings under Section 80C, the yield will be a good 9.8%.
National Savings Certificate (NSC) – As you might know, the ten-year NSC has been discontinued. So, now you can invest in only the 5-year NSC which is named the NSC VIII issue. The current interest rate on your NSC is 8%. The features of NSC include no limit to the maximum investment and you can use the investment as collateral for getting loans from banks and other financial institutions. The most important feature is that the investment qualifies for a rebate under Section 80C of the Income Tax Act. Note that even though the amount invested and the interest earned on your NSC are eligible for a tax deduction you, are required to pay taxes on the interest earned on your investment. The tax will be calculated as per your tax slab. So, if you invest in NSC, your effective post-tax return will be only 5.8% if you are in the highest tax bracket. But a better way of looking at it will be when you factor in the tax that you save. When you take into account the tax saved on your NSC, the yield on your NSC investment will jump to 10.4% if you are in the 30% tax bracket.
Public Provident Fund (PPF) – This is the only sovereign scheme where the interest earned, the amount deposited, as well as the maturity amount, are tax-free The interest is compounded annually. The interest rate for PPF is 8% presently and the maximum investment limit has been raised to Rs. 1,50,000. So, the effective yield on your PPF investment will work out to a good 16% at the end of a 15 years term.
Post Office Time Deposit – Just like you have bank deposits, you have post office time deposits. Time deposits offered by post offices have tenures of 1, 2, 3 and 5 years. Just like the NSC, there is no limit to the maximum amount that you can invest. There is also no limit to the number of time deposit accounts that you can open. The minimum deposit can be as low as Rs. 200. A minor of over 10 years can open and operate an account on his own. You have both single and joint accounts. The best part? Similar to the NSC, you can get a tax rebate under Section 80C of the Income Tax Act for your 5-year time deposit. However, as in the case of NSC, the interest earned will be taxable. Note that the rebate is not available for time deposits of other tenures. The current rates for the 1, 2, 3 and 5-year time deposits are 7%, 7%, 7% and 7.8% respectively. So, the after-tax rates for the 1, 2, and 3 year deposits would work out to 4.9%. For the 5-year time deposit, this will be 5.9%. If you take the tax rebate into account, you will get a yield of 8.6% on your 5-year time deposit. Currently, bank deposits and other deposits such as company Fixed Deposits (FD) are offering better rates than post office deposits of all tenures. You also get tax benefits on your 5-year bank FD. Also, note that your post office time deposits get auto-renewed on maturity and the interest rate on the date of maturity will be applied to the renewed deposit. In case of tax saver bank FDs, the maturity amount will be credited to your account.
| MIS | TD | NSC | |
| Investment amount | 1,00,000 | 1,00,000 | 1,00,000 |
| Interest rate | 7.3% | 7.8% | 8% |
| Tenure | 5 years | 5 years | 5 years |
| Maturity amount | Rs.1,00,000 | Rs.1,46,306 | Rs.1,46,930 |
| Total interest earned | Rs.39,720* | Rs.46,306 | Rs.46,930 |
| Tax (30% tax bracket) | Rs.12,035 | Rs.13,891 | Rs.14,219 |
| Annualized Net Yield (%) | 5.0% | 5.70% | 5.80% |
| Adjusted yield (%)# | NA | 10.3% | 10.4% |
* You would earn Rs. 662 per month for 60 months. #After tax saving of Rs. 30,900 on an investment of Rs. 1,00,000 under Section 80C. Compounding is quarterly for all schemes except the NSC. NSC is compounded on a half-yearly basis.
Now the question is which one of these schemes is the best fit for investors in each of the tax brackets? The PPF is a good investment for anyone irrespective of their tax bracket. You can consider SCSS if you are over 60 years. For those in the 10% tax bracket, the post office time deposit, NSC and MIS will make sense. A 5-year time deposit is a good option for those in the 20% tax bracket. Consider investing in the names of your major children to reduce your tax burden. And remember that bank FDs are far more liquid than any of the post office schemes.