On 31 March, the government slashed interest rates on small savings schemes. The Public Provident Fund (PPF) interest rate was cut from 7.1% to 6.4%. On 1 April, the Centre withdrew its order, saying it was issued due to an oversight. Mint explains the importance of these rates.
What are small savings schemes, essentially?
Small savings schemes are a set of saving instruments launched by the government of India. They include instruments such as the PPF, the National Savings Certificate (NSC), the Senior Citizens Savings Scheme (SCSS), and the Sukanya Samriddhi Scheme. The money raised from people who save through these schemes goes to the Centre and is put into a fund called the National Small Savings Fund (NSSF). As the money for these savings schemes is collected by the government, it also has a government guarantee. Many of these instruments also have tax benefits. For example, the interest on PPF is tax free.
How do you invest in or withdraw from these?
Small savings schemes are administered by the post office, nationalized banks, and some large private lenders. Some of these instruments like post office term deposits are only offered by the post office. You can invest in these schemes or withdraw from them by visiting a post office or bank branch and filling the relevant forms. Many banks have made this an online process, particularly for those wishing to contribute to small savings such as the PPF, which can be done through net banking. Remember that these institutions are simply intermediaries. The money you invest goes to the government.
Why are these interest rates different from those on FD?
Historically the government has kept small savings rates higher than fixed deposit rates as they are aimed at small savers. Most of these products have upper limits on investment. For example the SCSS has an upper limit of ₹15 lakh and PPF has an upper limit of ₹1.5 lakh per year. Wealthy individuals or corporations cannot take advantage of these rates due to the caps.
Do interest rates on small savings fluctuate?
Small savings rates are reviewed every quarter and hence can change for any of these schemes. However, in many cases, once you have locked in an interest rate, you will continue to benefit from it even if rates are slashed later. For example, if you have invested in SCSS at an interest rate of 7.4%, you will get this rate for the entire five-year term of the SCSS. In contrast, the PPF rate does not get locked. Your PPF account may earn 8% in one quarter and 7.4% in another depending on what rate has been set.
What alternatives do the investors have?
You can invest in debt mutual funds or bank fixed deposits. Bank FD rates are usually lower than small savings rates and do not carry tax benefits on the interest, with exceptions such as ₹50,000 per annum for senior citizens under Section 80 TTB of the Income Tax Act, 1961. Debt mutual funds held for longer than three years are taxed at 20% on gains. A new breed of debt MFs have been designed to mimic bank FDs by giving a predictable, but not guaranteed yield. One example of this is the Bharat Bond ETF series.