Good news for fixed income investors as the government has decided to keep the interest rates on small savings schemes
unchanged for the quarter ending September 30, 2021. This is the fifth
quarter in a row that the government has kept interest rates on various
post office schemes such as Public Provident Fund (PPF), National
Savings Certificates (NSC), Sukanya Samriddhi Yojana (SSY) and others
unchanged. This means that investors in PPF
and SSY will continue to earn the same interest rate as they were
earning during the quarter ending June 30, 2021. New investments into
these schemes will also earn the same interest rates as in the previous
quarter.
This was announced by the finance
ministry via a circular dated June 30, 2021. As per the circular, PPF
will continue to earn 7.10%, the NSC will fetch 6.8%, and Post Office
Monthly Income Scheme Account will earn 6.6%.
Here is a look at the interest rates on various small savings schemes for the second quarter of FY 2021-22.
Here is a look at the interest rates on various small savings schemes for the second quarter of FY 2021-22.
Interest rates on post office savings schemes
| Instrument |
Interest rate (%) for July 1, 2021 to Sep 30, 2021 |
Compounding frequency |
| Savings Account |
4 |
Annually |
| 1 year Time Deposit |
5.5 |
Quarterly |
| 2 year Time Deposit |
5.5 |
Quarterly |
| 3 year Time Deposit |
5.5 |
Quarterly |
| 5 year Time Deposit |
6.7 |
Quarterly |
| 5-year Recurring Deposit |
5.8 |
Quarterly |
| 5-year Senior Citizen Savings Scheme |
7.4 |
Quarterly and Paid |
| 5-year Monthly Income Account |
6.6 |
Monthly and Paid |
| 5-year National Savings Certificate |
6.8 |
Annually |
| Public Provident Fund |
7.1 |
Annually |
| Kisan Vikas Patra |
6.9 (will mature in 124 months) |
Annually |
| Sukanya Samriddhi Yojana |
7.6 |
Annually |
Source: Finance ministry circular
Small savings rate cut debacle
It
may be recalled that on March 31, 2021, the government had in fact
announced a rate cut for small savings schemes for the quarter ending
June 30, 2021. On late evening of March 31, 2021, the finance ministry
had announced that interest rates on small savings schemes have been cut
sharply by between 40 -110 basis points (100 basis points/bps = 1%) for
the first quarter of the financial year 2021-22. With the cut, interest
rates on small savings schemes would have been reduced by a total of
110-250 bps during the current year. After this cut, the interest rate
on PPF interest rate would have fallen below 7%, the first time since
1974, a 46 year low.
Then
immediately via an early morning tweet, the government announced that
the sharp cut in interest rates of small savings schemes had been rolled
back.
Relief for debt investors
The
government's status quo on small savings schemes rates comes a little
more than a month before the RBI's bi-monthly monetary policy review.
The apex bank is said to maintain status quo on key rates yet again,
which is again reason to cheer for investors of fixed income products.
That
is because with the RBI keeping rates unchanged, banks may not cut
interest rates on FDs any further. Some have even hiked FD rates.
FDs, bank savings accounts or small saving schemes?
Despite
banks not cutting FD rates for a couple of months now, small savings
schemes are, by and large, still earning higher interest rates.
Here's
the math: An investment of Rs 1 lakh in SBI's 1-year FD will fetch you
Rs 1,04,991 (interest rate of 4.90%) whereas investment in the post
office time deposit will fetch Rs 1,05, 614 (interest rate of 5.5%),
assuming quarterly compounding. This a difference of Rs 623.
Apart
from fixed deposits, even the interest rates on savings accounts
offered by some of the bigger banks is lower than the interest rate on
the post office savings account.
Post
office savings account is currently offering 4% per annum whereas SBI
is offering 2.70% per annum interest rate on its savings account.
Similarly, ICICI Bank is offering 3% per annum. Kotak Mahindra Bank is
offering 3.50% per annum for balances up to Rs 1 lakh and 4% per annum
for account balances between Rs 1 lakh and Rs 1 crore. For balances,
above Rs 1 crore, the bank is offering 3.50% per annum.
How interest rates are fixed for small savings schemes
The
government reviews and announces the interest rates on small savings
schemes every three months. The formula to calculate the interest rates
on small savings scheme was suggested by the Shyamala Gopinath
Committee. The committee had suggested that the interest rates on
different schemes should be 25-100 basis points higher than the yields
on government bonds of similar maturity
