Many senior citizens and individuals with high reliance on interest income are gutted after the government announced a 70-140 basis point reduction in interest rates on small saving schemes including National Savings Certificate, Public Provident Fund and SCSS etc. Many of these investments would deliver their lowest returns ever from April-June quarter. Are you distraught by the sharp interest cut in small saving schemes? Don’t worry. There is still one very safe option that offers higher than Read on.

What do they offer now

The government finally bit the bullet and cut the interest rate on the small savings schemes substantially for the first time. The quantum of cut was in 70-140 bps range. For April to June 2020 quarter, the interest rate applicable on the Senior Citizen Savings Scheme (SCSS) is 7.4%, Post-office Time Deposits will earn 5.5-6.7%, Monthly Income Scheme will give 6.6%, 5-year Recurring Deposit will earn 5.8%, Public Provident Fund will earn 7.1%, Kisan Vikas Patra will give 6.9%, and Sukanya Samriddhi scheme will earn 7.6%. The interest rate on Post Office Savings Account rate is untouched at 4%.

The positive side of all this is that SCSS, Sukanya scheme and PPF still give you 7%-plus yearly interest. That is not really that bad in the backdrop of long-term FDs of top banks fetching maximum 6.5% per annum. Also, from the safety point of view, small saving schemes come with the highest safety (government guarantee), which we can argue is even higher than some commercial and co-operatives bank deposits.

GoI bonds offer 7.75%

If you want to earn more, there are a few trust-worthy options. First and foremost is 7.75% Savings (Taxable) Bonds, which are issued by the Government of India. These bonds are sovereign in nature, and payment is guaranteed on maturity (7 years).

The GoI bonds are not restrictive like Sukanya scheme or Senior Citizen Savings Scheme in terms of eligibility. The bonds can be held by any individual in his or her individual capacity, or in individual capacity on joint basis, or in individual capacity on any one or survivor basis, or on behalf of a minor as father/mother/legal guardian.

The bonds are issued in ‘cumulative’ or ‘non-cumulative’ form, at the option of investor and bears interest at the rate of 7.75% per annum. Interest on non-cumulative bonds are payable at half-yearly intervals from the date of issue, and interest on cumulative bonds are compounded with half-yearly rests and is payable on maturity along with the principal. TDS is applicable.

Unlike the Rs 15 lakh limit in SCSS or Rs 1.5 lakh a year limit in PPF, these GoI bonds do not have any maximum limit for investment.

In terms of taxation, the interest on the GoI bonds are taxable under the Income Tax Act, 1961 as applicable according to the relevant tax status of the bondholders. The bonds will be exempt from wealth-tax under the Wealth Tax Act, 1957.

As per information, these GoI bonds are available on tap all through the year through state-owned banks like SBI and a few private sector banks, like Axis Bank, ICICI Bank, HDFC Bank, also allow these investments. They can also be bought through demat accounts maintained with some brokers.

Do note that premature encashment in respect of the GoI bonds is allowed for individual investors in the age group of 60 years and above, subject to various things and a minimum lock in period (lock in period for investors in the age bracket of 60 to 70 years is 6 years, for age bracket of 70 to 80 years it is 5 years and for age of 80 years and above it is 4 years).

They are non-transferable, not traded on bourses and cant be used as collateral.

Read more on the RBI notification on GoI bonds here.

RupeeIQ take

Compared to Government Securities (G-Sec) that offer in the 6-6.3% range, GoI bonds offer a higher interest rate. Unlike small saving schemes, as per our understanding, these GoI bonds are not benchmarked to external debt market returns. Hence, it is difficult to understand how interest on these bonds will be lowered in the future. If you lock in these rates before the government does some tweaks, they will have to pay you 7.75%.

You can also explore top PSU bonds, of NTPC, NABARD, NHPC, EXIM BANK, SBI, PFC etc., and try to get higher than 7.75% interest rate. We would ask you to avoid BFSI names in the private sector space. Do not be lured by high yield to maturities (YTMs) in private sector NBFCs.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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