NEW DELHI: The government has slashed interest rates on small savings schemes, such as post office deposits and public provident fund, by up to 110 basis points, dealing a fresh blow to savers seeking safety.
The new rates, effective Thursday and applicable for the first quarter, coincide with the government’s move to tax interest income on annual employee contributions of over Rs 2.5 lakh in provident fund, while giving government employees exemption up to Rs 5 lakh contribution. The move has already prompted several private sector employees to review their voluntary contributions to escape the Rs 2.5 lakh threshold.
The latest rate action on small savings will go beyond active workers to include senior citizens as well as the girl child, who are major beneficiaries of the schemes. Senior citizens are already amongst the worst hit by falling rates as bank fixed deposit rates have crashed, leaving them with lower interest income.
Senior Citizens Saving Schemes and National Savings Scheme will see a 90-basis point reduction, while the popular PPF and Kisan Vikas Patras will see a 70-basis point fall.
The sharpest cut of 110 basis points (100 basis points equal a percentage point) was reserved for one-year fixed deposits, while three-year deposits will see a mere 40 basis points cut.
For senior citizens with five-year deposits, the new rates are in line with the rate on three to five years deposits offered by State Bank of India, which is also at 5.8%. But the bank is paying higher than post office deposits in maturity buckets of one, two or three years. In case of other deposits, SBI is currently offering higher rates across maturities.
The move will provide relief to banks, which compete with these schemes when it comes to raising deposits.
Although the government has been arguing for a market-linked interest rate on small savings schemes, its actions have not always been in line with the market movement.
The revised interest rate of 6.4% on PPF, where up to Rs 1.5 lakh can be deposited annually, is significantly lower than the 8.5% proposed to be paid by the Employees Provident Fund in 2020-21. In both cases the tax benefits make the returns higher. Besides, both savings instruments come with the power of compounding. So, after a certain period your annual contribution can be matched by the interest income that you earn.