Moving quickly to contain public outrage ahead of key state polls, Union Finance Minister Nirmala Sitharaman on Thursday Morning announced that the move by her ministry on March 31 late evening to slash rates of small savings schemes was an “oversight” and the previous rates will continue for April-June quarter.
“Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn. @FinMinIndia @PIB_India,” Sitharaman said in her Twitter handle.
The rate cut announcement and then the hurried recall is unique.
On March 31 late evening, the Finance Ministry had announced the lowering of interest rates on various small saving schemes such as National Saving Certificates (NSC) and Public Provident Fund (PPF) between 40 basis points and 110 basis points. The pay-out on PPF has now come down to a multi-decade low of 6.4 per cent. This would have hit fixed income investors, especially those in senior citizens group.
The new rates were said to come into effect from April 1 i.e. be valid till June 30. Contributions made on or after April 1 would have fetched a lower rate, while those made till March 31 would have got old rates. The small savings schemes basket comprises 12 instruments, including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Scheme. If the latest round of cuts held, interest rates on small savings schemes have been reduced by a full 110-250 basis points in financial year 2020-21.
As per the Finance Ministry announcement on March 31, with effect from April 1, 2021, Public Provident Fund (PPF) will fetch 6.4 per cent down from 7.1 per cent earlier, National Savings Certificate (NSC) will get you 5.9 per cent, down from 6.8 per cent earlier, Sukanya Samriddhi Yojana (SSY) will give you 6.9 per cent, down from 7.6 per cent earlier. Post office time deposit rates across tenures have been reduced and will earn between 4.4 per cent and 5.8 per cent compared to earlier range of 5.5 per cent to 6.7 per cent. Senior Citizen Savings Scheme will fetch 6.5 per cent, down from 7.4 per cent previously. Kisan Vikas Patra will fetch 6.2 per cent, down from 6.9 per cent earlier. Savings deposit rate will be 3.5 per cent, from 4 per cent earlier.
The government can revise the interest rate at the beginning of every quarter. Since 2016, interest-rate resetting has been done based on yields of government securities of the corresponding maturity, with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee.
This was the second time the government had cut interest rates on small savings schemes in the past twelve months. In the April-June quarter of 2020-21, the government had slashed rates of small savings schemes by 70-140 basis points. 100 basis points/bps is equal to 1 per cent.
Tag: PPF
How to invest in your child’s name
Educating children today isn’t as easy as it was decades ago. The cost of education is much higher and every parent wants their child to study in premier institutes. That’s the reason why many parents start saving for their children as soon as they are born. While making investments in your name for their education seems easy, investing in the child’s name will help make saving easier. Here’s how you can invest in their names.
Why invest in your child’s name
When you invest in your child’s name, you will not touch those investments in times of need. Theirs will be the last investment that you will liquidate if you are in want of money.
What are the rules regarding minor investments?
If you are investing in mutual funds for your children, note that there can’t be a second holder or a nominee for mutual funds made in a minor child’s name. You need to be registered as a guardian for the investments. If you need to make any changes to this information, you will need to write to the mutual fund house. If you are not directly investing in mutual funds and are having the mutual funds in demat, the demat account has to be in your child’s name. You will need to be the guardian for the demat account.
You will need to complete the know-your-customer (KYC) process for the investments. In case you have set up Systematic Investment Plans (SIP), note that some banks may not allow internet banking for minors. There might be restrictions on use of cheques for the minor’s bank account. It is best to choose a bank that offers good banking services for minor accounts.
Where should you invest?
Even though there are children’s mutual fund schemes (read this article for information on them), you should look at many kinds of mutual funds that are available in the market. Children’s schemes only help in being disciplined when staying invested because they come with lock-ins. They do not offer any extra benefit. Equity linked saving scheme, that is, tax saving mutual funds in the name of your child can be avoided as they have a three-year lock-in and you cannot claim tax deduction under section 80Cfor the investment.
Mid cap and small cap funds can be considered if you are investing for your child’s education that is at least 5 years away. Thematic funds are best suited for high risk profile investors who are investing for higher returns.
There are fixed-income options such as the Public Provident Fund (PPF) and the Sukanya Samriddhi Yojana (SSY). You can open a PPF account in your child’s name. However, the overall investment including your PPF account can be only Rs. 1,50,000 a year. SSY which is a savings scheme for the girl child below the age of 10. For SSY too, the maximum annual contribution to the scheme is set at Rs 1,50,000. The contributions are eligible for tax deductions under section 80C.
What will happen after your child turns 18?
If you have been making monthly investments using ECS mandates, those will be stopped. Your investments will be frozen. You will need to get a Permanent Account Number (PAN) in your child’s name. You will need to complete the KYC norms. Once your bank removes the minor status for the child, you can ask the mutual fund house to change the investments to your major child’s name. You will need to provide them with documents such as your child’s signature, bank account details and other documents. You need to follow up with each of the fund houses to get this done. Once the mutual fund folio is in your major child’s name, you will not have control over those investments. Your child will be in charge of those investments.
Do you need to pay tax?
When you sell the investments, the money will get credited to the child’s bank account. The capital gains earned on the investments will be clubbed to your income and will be taxed at the tax rate that is applicable to you. If both you and your spouse are earning, then the gains will be clubbed with the parent whose income is higher. There is an advantage when the income gets clubbed. When your income includes the income from your minor child, you can claim an exemption under Section 10 (32). This can be up to Rs. 1,500 or the clubbed income, whichever is less. However, if the investments are sold after the child turns 18, the tax liability will be on the child.
Note that for special children, the capital gains and income earned on the investments will not be clubbed with the parents’ income if you invest in the child’s name. The clubbing provisions under Section 64 of the Income Tax Act, 1961 specifically excludes ‘special child suffering from any disability as defined under Section 80U of the Act’.
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How to plan your taxes
There are two sorts of taxpayers. There are ones who plan their taxes at the last minute and are in danger of committing certain expensive errors. Then, there are those who start their tax planning early and are better-situated to limit their tax outgo effectively. If you’re hoping to have a smooth tax saving plan and want to earn more in the process, you should start planning your taxes early. Here’s how you can do that.
Tax planning should come after financial planning
The most common mistake that people do is buying or investing in financial products that add no value to their life goals. For instance, a single earning member with no dependents buying an insurance policy to save taxes. Understand that financial planning is more important than saving taxes. First, you need to figure out your life goals and how much money you need to achieve those goals. Accordingly, choose suitable investment avenues and make tax planning a part of that process. The investments must first align with your long-term goals. Look at tax efficiency as an added benefit. Are yet to make your financial plan? Get in touch with consultants at wealthzi.com.
Start planning early
Investing in tax saving products at the last minute can reduce the returns that you could have earned on the same amount if you planned well on time. For instance, Rs. 50,000 invested in Public Provident Fund (PPF) in April will earn you more returns over the year when compared to investments made later in the financial year. Even money invested in an equity-linked savings scheme (ELSS) will earn higher returns, if invested in a staggered manner from the start of the year, rather than an amount invested later.
Calculate your tax obligation
Make an estimate of your tax liability for the financial year and use that to determine your monthly tax commitments. It will help you to determine how much your tax liability will be at the end of the year. If there is a change in your income in any month or quarter, you can easily increase or decrease your investments when you compare it to the tax plan.
Consider the allowances
There are several allowances that you might get from your employer. This could include food coupons, mobile reimbursements and internet bills. These lower your tax liability. When you plan your taxes consider these allowances. This will help you not put excess money in tax saving products, leaving you with funds for your household expenses.
Choose the right investments
When you start planning your taxes early, you have enough time to choose the right tax-saving instruments. Early tax planning provides you the time to carefully evaluate the returns offered by your shortlisted financial products and find out which ones are aligned with your financial goals and risk appetite. You should ideally select those investments that can help you achieve your life goals on time.
For instance, if you are near retirement, you may profit more by putting your resources into tax saving fixed income products that are safe, such as PFF, National Savings Certificate (NSC), among others. Then again, in the event that you are young and are looking for an exceptional yield, you should keep certain high-risk tax saving products such as ELSS in your investment portfolio.
It will be relevant to note here that there are different tax savings instruments that come with a lock-in time of 3 years, 5 years, and significantly more. You can pick one according to your life goals and the time needed to achieve them.
Invest in instalments
A typical mistake that people do is committing large sums of money as the financial year comes to a close. This isn’t very prudent. Truth be told, it’s smarter to contribute through instalments to benefit from rupee cost averaging while keeping liquidity worries under control.
As you draw closer to the end of the financial year, you can start increase or stop investing based on the limits under the Income Tax Act. For instance, under Section 80C the limit is Rs. 1.5 lakhs. There is no point investing more in 80C financial products if you have already exhausted the limit. Investing in instalments will help you assess your tax exemptions every month.
April is a good month for planning taxes in light of the fact that most organizations provide salary hikes at that time. It is not a bad idea to invest your bonus in tax-saving products at the start of the year so that you don’t have to worry about tax savings later.
Note the tax changes
There are many tax changes announced in the Union Budget ever year. For instance, earlier if you had capital gains from selling a house, you could use it to buy only one house for tax exemption. However, now you can buy two houses, if the capital gain amount does not exceed Rs. 2 crore. This can be done once in the lifetime of the taxpayer. Make a note of these tax changes that’s relevant to the financial year in which you file our tax returns so that you can save taxes in that year.
