For generations, small savings plans have been the bedrock of Indian household finances – a quiet, reliable habit passed down over time. Millions of families have hidden their savings in post office savings accounts, Public Provident Fund (PPF) or invested in National Savings Certificates or Kisan Vikas Patra. The goal was simple — salvage everything they could and hope to build a stable collection that could be used for important events such as higher education, their children’s wedding expenses, building a house, for life after retirement, or even life-threatening illnesses.
With the strong returns and tax benefits available under the erstwhile Section 80C of the Income Tax Act, 1961 (now Section 123 of the Income Tax Act, 2025), small savings schemes initially helped “foster the habit of thrift and saving among the citizens” in the newly independent India. Over the years, these schemes have gained popularity and new generations continue to invest in them.
Some of these schemes began decades ago, others are more than a century old, with their origins dating back to the pre-independence era. The State Savings Bank Act was passed in 1873, and the Indian Post Office Savings Bank came into existence in 1882. After independence, small savings gained greater momentum, and the National Savings Organization was established in 1948.
Since then, many new schemes have been launched, creating a whole range of products targeting different borrowers. In recent years, the Sukanya Samriddhi Yojana was launched in January 2015 under the Beti Bachao, Beti Padhao campaign launched by the government. The Mahila Samman Savings Certificate Scheme was launched on March 31, 2023 to promote women’s financial independence as a special two-year scheme until March 2025.
But in recent years, a combination of factors has somewhat reduced their appeal for small investors. but. With volatility in stock and commodity markets, experts say small savings plans are still holding up. This is reflected in net flows into small savings, which are then pooled into the National Small Savings Fund (see chart: Net flows into small savings). The net collections from the National Social Security Fund are invested in private securities of the Central and State governments as well as in various public agencies to help the Center and the states meet their fiscal deficit.
Powerful tool
Economists highlight the role of small savings in boosting domestic household savings which has played an important role as a primary source of capital formation in the country needed for investments throughout the economy. The decline in household savings has been a topic of discussion in recent years, and within the context of small savings, it is another concern. Household savings are estimated at Rs 69,000 crore in FY25, which is equivalent to 62.1% of GDP. In absolute terms, household savings were seen at a lower level of Rs 52.25 lakh crore in FY23 but accounted for a larger share of GDP at 67.2%.
DK Srivastava, Senior Policy Advisor, EY India sums up this trend and points out that the share of small savings in total domestic savings has declined in recent years – from 3.9% of total domestic savings in FY23 and 4.4% in FY24 to 3.1% in FY25. “As a saving instrument, small savings have become less attractive to households,” he says, adding that the share of small savings in financing the fiscal deficit has also declined in In recent years, the government has relied more on market loans.
The EPFO continues to offer a strong interest rate of 8.25%, notes the general secretary of the Grand National Trade Union Confederation, Hind Mazdoor Sabha, Harbhajan Singh Sidhu. “If interest rates do not remain attractive to borrowers, as happened with fixed deposits, it will eventually impact domestic savings, which are essential for the economy,” asserts Sidhu, who is also a member of the Central Board of Trustees of EPFO Bank.
Small savings are slowly losing popularity as the preferred investment option as stock markets gain momentum and products such as mutual funds and systematic investment plans as well as newer investment options such as gold, cryptocurrencies and real estate offer much higher returns. Besides, the shift to a new income tax regime that offered no exemptions but lower tax slabs, also reduced the attractiveness of these schemes to some extent.
The returns of these schemes have not changed for more than eight consecutive quarters. The Shyamala Gopinath Committee, set up to study small savings schemes, had proposed a market-linked formula for interest rates for small savings which should be 25 to 100 basis points higher than the average return on government securities of the same maturity for the previous quarter.
However, to protect small investors from very low returns, the government often also chooses to keep interest rates artificially high.
Government sources have often pointed out that the after-tax returns on these schemes remain much higher compared to many other schemes, which represents an advantage for small savers. For the Treasury, small savings can be a big expense because they mean higher interest rates and therefore borrowing from the National Social Security Fund at a higher rate.
Finance Minister Nirmala Sitharaman recently took up the issue, calling it a “double whammy”, as it is costing the government on both sides. Pointing out that retail investors nowadays save through various platforms, she also said that it poses a major “ethical dilemma” for the Ministry of Finance every quarter. “Whether you’re going to drop this and cause harm to the elderly, who are probably living on the small interest rate they’re earning from it, but it is. We’re ensuring that they’re not earning less, but likewise if you just looked at the National Social Security Fund, it’s from the same fund that I’m borrowing from.”
However, with the recent volatility in equity markets over the past year and a half, returns on many products have become fragile. For example, short-term returns of mutual funds have become uncertain.
Interest rates on fixed deposits have also become less attractive amid rising inflation and tax treatment.
Fixed returns
Srivastava notes that with increasing uncertainty caused by conflict in West Asia and with net foreign capital outflows from India, the government may need to rely more on domestic savings to finance the fiscal deficit. “In this scenario, the government can encourage small savings as a means for medium and long-term investments,” he says. “For this to happen, interest rates on small savings instruments must be reviewed.”
Experts also highlight the role of small savings in diversifying investment portfolios, and point out that consistent returns mean they remain the investment vehicle of choice for many small investors despite the lower tax benefits available in the new income tax regime to which nearly 90% of individual taxpayers have migrated.
The most popular among small savings plans are PPF, Sukanya Samriddhi Plan, National Savings Certificate and Senior Citizens Savings Plan.
However, one must remember that investments tend to be closed for a fixed period and those looking to exit must remember that accounts under these schemes can only be closed prematurely under certain circumstances. There are also minimum and maximum investment limits in most schemes.
Harshad Chettanwala, co-founder of financial planning platform MyWealthGrowth.com, says small savings plans should not be looked at from a tax savings point of view because Section 80C is only available to those in the old income tax regime.
“PPF and Sukanya Samriddhi still enjoy tax exemption on interest and assets. But from the perspective of diversifying your investment portfolio, small savings are still a good option and can be part of an investor’s debt allocation,” says Chetanwala.
He explains that the Senior Citizens Savings Scheme is particularly useful for retired investors or those on the verge of retirement, but one must remember that the money is locked up in this scheme and hence it is not a good option for those looking for easy liquidity.
PPF is also a good option for those who are not part of any social security scheme like Government Provident Fund or Employees Provident Fund. “These could be self-employed professionals or business owners,” says Chettanwala.
Tax treatment
To be clear, taxpayers under the old income tax regime still enjoy the benefit of tax exemption of Rs 1.5 lakh for specific investments, including those for small savings. But this is no longer available under the new income tax system. However, the interest amount and entitlement under PPF and Sukanya Samriddhi Scheme are tax-free. Other schemes tend to be taxable at the relevant slab rates.
Shaili Gupta, partner at law firm Khaitan & Co, explains the nuances and says that even though the tax saving benefit of Section 80C is no longer available to those subject to the new income tax regime, PPF is still a preferred investment option as it inculcates the habit of saving and gives a good return. Moreover, the interest and amount at maturity are completely tax-free.
The Sukanya Samriddhi Yojana is the second most preferred option and is a very tax efficient scheme for the girl child, she says, adding that it also offers tax exemption for interest and maturity amount.
“National Savings Certificate also remains very popular with some segments of taxpayers, but is not as commonly preferred as PPF, since the Rs 1.5 lakh aggregate annual deduction limit under Section 80C is often fully utilized by PPF contributions alone.”
While interest earned on NSC is taxed on an accrual basis, it is considered reinvested and therefore eligible for deduction under section 80C (under the old regime) for the first four years.
“The interest accumulated in the fifth year of the scheme is not reinvested, but is paid to the investor and is therefore not eligible for deduction under Section 80C and is taxed at the applicable slab rate,” says Gupta. She adds that the Senior Citizens Savings Scheme remains very popular with retired investors looking for regular income because it provides quarterly interest, but the interest amount is taxable.
Most importantly, small savings programs continue to reinforce the original goal for which they were created: to instill the habit of saving. In fact, bankers and investment advisors point out that even Generation Z continues to invest in schemes like PPF in which their parents may have opened accounts for them.
While small savings may not be the focus, they are unlikely to lose their place in a retail investor’s portfolio. This is especially true in the current era of global volatility where safe haven investment opportunities are often few and far between. And perhaps, in this case, old is gold!
@surabhi_prasad
