Post office savings schemes (Tax Planning)

Today, I’ll cover some points of the conventional savings plan – The Post office saving schemes.

Post office savings schemes are extremely common in our country. Now a days, even brokerage firms like ICICIdirect are offering to invest in Post office schemes through online trading accounts.

A look at the scheme gives a good picture:
• A fixed interest rate of 8%
• Lock-in period of 6 years
• Tax benefit (major attraction for such schemes)
• Easily accessible at your neighborhood post office

As compared to the usual PPF savings account which has 15 year long maturity term, the post office savings scheme has a major advantage that it has only 6 year long maturity. However, the interest of 8% is 0.5% lower than that offered by PPF account (8.5%) and another disadvantage of post office savings scheme is that the interest you earn is taxable.
In case of PPF account, the interest you earn is completely tax-free.

Hence, there is a clear trade-off when one compares the post office savings scheme with PPF account.

These are some of the advantages and disadvantages of the post office savings scheme, which can be found on majority of financial websites and financial planning documents and leaflets.

However, there is a major risk involved in post office saving scheme from my point of view. Here is the list that I believe should be looked at when deciding whether you should opt for tax saving through post office savings scheme or not:

• Your friendly neighbourhood post office is really unsafe:

If you believe that the money you deposited in the post office scheme is safe, think again. Hundreds of thousands of post offices are spread across the country. They are running in small rooms which hardly have any security. When safe banks and locker rooms with security guards can be robbed in broad daylight, are the post offices running in 1 or 2 room buildings safe?

• No computerization: All Paperwork

If you deposit money in your post office savings account, the sole proof that you have is a paper receipt; may be even an entry in a passbook. However, there have been numerous incidents of mismatch in the passbook entries with those on the registers of the post offices. You might be given a paper certificate, but it becomes your responsibility to maintain it. If you loose it even by mistake, you will be made to run from pillar to post to get your money back

• No Roaming facility

None of the post offices offer deposit of money in one post office and withdrawal in the other. In the present world, where relocation is going on at a rapid pace, it is a must to have some such facility, which unfortunately may not be available as of now in your post office savings accounts

• Duping chances by agents:

The chances are high that one may be duped by the agents of so called post office schemes. Several stories have been unearthered where the so-called agents promised people to invest in post office schemes and eloped with the savings of their lifetime. There is no identity proof for such people issued by the post offices. Even if they do issue, there is no way to verify them

• Lack and knowledge and the common “government job” attitude:

It’s easy to spot, but difficult to explain. The post office in my neighbourhood always has only one single person. He takes the posts, speedpost, registered posts, deposits, withdrawals, etc., etc. Apparently, he handles everything. Everything is maintained in paper registers. Chances of mistakes are quite high and the rest is explained by standing in the queue for atleast 30 mins even if there are 2-3 people in-front of me.

So my opinion, don’t go for post office schemes. Better opt for tax saving infrastructure bonds with a lock in period of 3 to 6 years and the interest rate ranging in the region 5% to 9%.

Have much longer investment horizon, go for PPF, but Post office savings schemes are a serious no-no in their present form and with the given infrastructure.
I compare it to the UK post offices, which offer multifaceted offerings to their customers. Right from postal services, greeting cards, stationery, they are in the business of money, credit cards and even phone cards as well. Government should improve the post office schemes and the way they work, else the scheme will be completely out of interest for the young generation who are willing to have everything online.

Here are some more practical cases of how Post office Investments are risky and what they cost to the innocent investors