Government Spares The Cut For Small Savings Interest Rates

  Author: Kundan Kishore

Government has decided to retain the prevailing interest rates of Small Savings Schemes. These are schemes like Public Provident Fund (PPF), National Savings Certificates (NSC) and many others which are typically available for small investors in post offices across the country with select banks providing some schemes like PPF and Senior Citizens Savings Scheme.

Deposit rate pressure after demonetization After its demonetization drive where it demonetized Rs 500 and Rs 1,000 notes in November, 2016, banks were flooded with cash deposits of the demonetized notes, As a result, banks have started reducing their deposit rates. This also indicates that accepting deposits from public is no longer on the banks’ top priority. In the future, people who majorly dependent on interest from fixed deposit as a source of income, will be hit by fall in deposit rates. Many senior citizens who park their retirement savings in fixed deposits will be impacted significantly. The saving grace for investors in low-risk investments is that the government has decided not to reduce the interest rate of Small Savings Scheme investments.

Earlier, government used to change the interest rate of Small Savings Schemes on an annual basis. It then changed the system to make the adjustments in interest rates quarterly. Government has now linked the interest rate of these small savings schemes to interest rate based on the yield of government securities in the debt market. However as the government has decided not to change the interest rate for this quarter, it means that interest rate on these schemes will remain unchanged at least March 31, 2017.

Benefit from higher interest rate on long term deposits During this period, almost all banks will have lower interest rates for fixed deposits of two years and more. Most of the prominent banks are offering an annual interest rate of 7% or lower, for deposits of two years and more. So, if you have surplus money to park or FDs are maturing during this period yiu and wish to re-invest them for two years or more, you have a window of around three months to park your money in deposits at relatively high interest rates. But wait, there’s more.

Also get tax savings benefits There are a few Small Savings Schemes that provide annual tax deduction of upto Rs 1.5 lakh under Section 80C benefit. The deposits in the next few months could get you tax deductions too. The schemes are: National Savings Certificate (NSC), 5 year tax saver Time Deposit (TD), Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA) and Senior Citizens Savings Scheme (SCSS). However, these schemes come with lock-in period. This is 5 years for NSC, 5 years for tax saver TD and SCSS, and 15 years for PPF. Of course, investments for SSA are locked in till the girl child attains the age of 21 years.

 The table here will give you a snapshot of prevailing interest rates for Small Savings Schemes.