Small Savings Schemes Interest Rates Slashed [AGAIN]

Small Savings Schemes Interest rates are on the down ward spiral.  Finance ministry again slashed interest on these saving instruments by 0.1% (10 basis points).  From the year 2016 government started reviewing interest rates on small savings schemes on quarterly basis.  The aim of this is to keep the rates on these schemes inline with market interest rates. The rates of small saving schemes or (SSS) are decided based G-Sec yields (Government Securities Yield) of the previous three months.

small savings schemes are mainly postal schemes like KVP, NSC and PPF (Public Provident Fund), sukanya samrudhi scheme for girl child, Senior Citizen Savings Scheme, Post Office Monthly Income Scheme (POMIS), 5 Year Term Deposit etc.,

New Small Savings Interest Rates Effective From 01 Apr 2017

small savings schemes interest rates with effect from 01 april 2017

If you are unable to see the above table of new small savings interest rates effective from April 2017, you can check them in the below table.

Instrument NameRate of interest w.e.f. 01.04.2015Rate of interest w.e.f. 01.04.2016Rate of interest w.e.f. 01.04.2017
 Savings Deposit4.004.004.00
5 Year Time Deposit8.507.907.70
 5 Year Recurring Deposit8.407.407.20
 5 Year Senior Citizens Savings Scheme9.308.608.40
5 Year National Savings Certificate8.508.107.90
Public Provident Fund Scheme8.708.107.90
 Kisan Vikas Patra8.707.807.60
Sukanya Samriddhi Account Scheme9.208.608.40

As can be seen from the above table, interest rates on these savings schemes are on the declining path and are expected to be so in future too.  For example from an interest rate of 8.7% in 2015, it is now 7.9% for PPF. Except for savings account deposit, all have declined from a range of 0.6% to 1.2%.

declining small savings interest rates since 2015

These declining trends in these schemes is a big blow to small investors.  Most investors in rural and semi-urban areas invest in such schemes.  Although the rates are in declining mode, still investors can opt to invest in them as they are offering better returns than other similar risk bearing instruments.  But the problem is are the investors in such schemes can get inflation adjusted positive returns?

Most probably NO.  Specially if some one is saving for their children’s needs like higher education and marriage.  Inflation of education or marriage expenses increase more than popularly measured CPI inflation.  So even if they give CPI adjusted positive returns, still one can not have enough corpus to reach their goals.

What can be done then?  The obvious answer is invest in equities and equity related instruments for long term goals like children education, marriage.  One can choose them even for retirement planning, providing they are starting early for this purpose.

How the Small Savings Schemes Interest Rates are Decided?

As per the recommendation of Shyamala Gopinath panel, the interest rates of small savings schemes (SSS) are declared every quarter based on the formula. The formula for calculation of interest on small savings schemes considers Yield on Government Securities of last three months.  But these schemes offer little higher interest rates than G-sec Yields.  Government offer higher interest rate spreads than market yields to encourage small investors to opt for these instruments. Small investors can still benefit by investing in such schemes as they offer higher interest rate than existing market yields.

Interest Rate spreads on small savings schemes

PPF (Public Provident Fund) – 25 BPS (basis points)

Senior Citizen Savings Schemes – 100 BPS

Sukanya Samridhi Scheme – 75 BPS

5 Year Time Deposit – 25 BPS

National Savings Certificate (NSC) -25 BPS

Monthly Income Scheme (POMIS) – 25 BPS

These are the additional percentage given to investors in particular schemes in addition to the 3 month G-Sec Yields.

 

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