Returns from small savings are set to become smaller. The central government has announced a steep cut in the interest on small savings schemes. Days after the Reserve Bank of India’s (RBI) cut lending rates, the government today revised the interest rates on small savings scheme for April-June quarter by 0.7% to 1.4%. The interest on small saving schemes is linked to debt market returns, and rates are revised on a quarterly basis. It is estimated that a total of Rs 12 lakh crore is parked in small saving schemes.

On December 31, 2019, the government had decided to keep interest rates for many small savings schemes like PPF and NSC unchanged. The steep cut in interest rates for April-June 2020 quarter is expected to help banks cut deposit rates further, and then pass the benefits in the form of lower loan rates. Banks often argue that higher rates offered in small saving schemes offered by the government are too high, and banks cannot compete for public deposits if these schemes offer higher than bank rates. Banks have over Rs 110 lakh crore deposits. On its part, the central government uses the small saving scheme collections to reduce its market borrowing burden. Borrowing in the form of securities against NSSF (National Small Savings Fund) for fiscal 2021 is expected to stay at Rs 2.4 lakh crore.

Take a look below at the previous interest rates for Jan-Mar 2020 quarter and the revised interest rates for Apr-Jun 2020 quarter.

Time deposits – Post office offers time deposit options with 4 different tenures i.e. 1 year, 2 year, 3 year and 5 year. The government has cut the 1 year, 2 year and 3 year time deposit interest rates (compounding quarterly) from 6.9% to 5.5%. This means that interest earned per year on Rs 1 lakh investment will drop from Rs 7,080 to about Rs 5,600. The government has cut interest on 5-year time deposit to 6.7% from 7.7%. This means that interest on Rs 1 lakh investment will drop from Rs 7,925 to about Rs 6,900. Please note the examples are based on estimates that the revised rate will continue for 1 year.

Recurring deposit – There is a 5-year recurring deposit offered at the post office. For April-June quarter, the government has cut the interest rate for RDs to 5.8% from 7.2%. The compounding frequency is quarterly. Hence, Rs 1 lakh investment in 1 year will generate about Rs 3,963 interest (recurring deposit we have assumed Rs 8,333 per month for 12 months). Under the revised rate of 5.8%, the interest will be about Rs 3,200.

Senior Citizen Savings Scheme (SCSS) – This is a very popular investment scheme for senior citizens, since it gave higher than bank deposit rates. The central government has cut the interest from 8.6% to 7.4%. The compounding frequency is quarterly. Though the revised rates are still higher than deposit rates of top banks, the lower interest rate will hit senior citizens who only depend on SCSS for income. Quarterly interest income at 8.6% was Rs 2,150 previously on Rs 1 lakh investment and this will become Rs 1,850 (quarterly interest).

Monthly income account – This is popularly referred to as MIS in the post office parlance. This is used by many people who do not have any monthly income source like salary, pension. The central government has slashed interest rates on Monthly Income Account (compounding frequency is monthly) to 6.6% from 7.6%. This means a Rs 1 lakh investment will now fetch about Rs 550 from Rs 633 per month.

National Savings Certificate (NSC) – In the case of NSC, which comes with a 5 year tenure, the interest rate has been cut from 7.9% to 6.8%. The compounding frequency is annual. Earlier at 7.9%, Rs 1 lakh could fetch interest gain of Rs 7,900 per year and a total of Rs 46,250 for 5 years. Under the revised lower rate of 6.8%, Rs 1 lakh would fetch Rs 6,800 per year and also a lower maturity value at end of five year tenure.

Public Provident Fund (PPF) – For middle-income families, PPF is the go-to tax-saving instrument. Since PPF allows upto Rs 1.5 lakh investment in one year and has a tenure of 15 years, it is preferred by many for long-term investment avenue. PPF deposits qualify for deduction from income under Sec. 80C of IT Act and also the interest earned is completely tax-free. The central government has slashed the interest on PPF from 7.9% (compounding annually) to 7.1%. If interest rates remain at similar levels, the PPF corpus targeted by many depositors will be much lower than previously thought.

Kisan Vikas Patra (KVP) – This small saving scheme is marketed as an instrument where your money doubles. The interest compounding is done annually. At the previous interest rate of 7.6%, the initial investment doubled in 113 months (9 years & 5 months). At the revised rate of 6.9%, the initial investment will double in 124 months i.e. 11 months more time will be required.

Sukanya Samriddhi Account (SSA) – This scheme is targeted towards parents who want to save for girl child. A guardian can open only one account in the name of one girl child and maximum of two accounts in the name of two different girl children. An account can be opened up to the age of 10 years only from the date of birth. The central government has cut interest rate in SSA to 7.6% from 8.4% earlier. The compounding frequency is annual.

Savings deposits – The interest on savings deposits has been kept unchanged at 4% a year.

The formula to arrive at the interest rates of the small savings scheme was given by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of different schemes should be 25-100 basis points (bps) higher than the yields of the government bonds (G-Secs) of similar maturity.

Read the latest government notification on revised rates here.

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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