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.
Interest rates on post office savings schemes
|Instrument||Interest rate (%) for July 1, 2021 to Sep 30, 2021||Compounding frequency|
|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.