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Disillusioned with debt MFs? Catch post office schemes' high interest rates before June 30

The small savings rates may be revised downwards at the reset date post June 30 as not only has the RBI cut the repo rate but also the 10-year G sec yield has declined.

, ET Online|
Updated: Jun 25, 2019, 02.56 PM IST
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interest-rate-getty
The interest rate offered on these schemes are reviewed and fixed every quarter by the government.
Debt investors disillusioned with defaults in mutual funds and looking for safer options may have a small window of five days up to June 30 to lock into the highest interest rates available today which are also comparatively safer. Post RBI's last repo rate cut, most leading banks have reduced fixed deposit interest rates but small savings interest rates are currently at higher levels because these are reviewed quarterly and fixed administratively by the government. The small savings rates may well be revised downwards at the upcoming review or reset date post June 30 as not only has the RBI cut the repo rate but also the 10-year G sec yield has declined.

In fact, the Reserve Bank of India (RBI) has cut the repo rate thrice this calendar year by 25 basis points (bps) each and 10-year Government securities (G-sec) yields are close to 20-month lows. Both these have a part to play in the direction of the interest rates of post office small savings schemes.

Current interest rates of post office schemes are high for the level of safety offered by them i.e. there are no or few other instruments offering the same level of safety and equally high or higher interest rates. Leading banks (which may be considered to be reasonably safe) are offering much lower rates on fixed deposits. RBI savings bonds are currently offering only 7.75% with a longer tenure against 8 % offered by NSC with a shorter tenure.

It may well be that the interest rates are cut only for some of the small savings schemes and not for all. Interest rates on the senior citizen savings scheme and the Sukanya Samridhi scheme for the girl child may be maintained given the social aim of the schemes. However, rates on NSCs which are currently offering 8 percent and other schemes such as the Post office monthly income scheme could see a reset downwards.

Repo rate movement since 2014
repo rate
Source: RBI

Link between small savings schemes, repo rate, and G-sec yields
The interest rate offered on these schemes are reviewed and fixed every quarter by the government. In June 2011, the Shyamala Gopinath committee had suggested that small savings rates be linked to bond yields. In its report, Comprehensive Review of National Small Savings Fund, the committee had suggested that interest rates of the different small savings schemes should be 25-100 bps higher than yields of government bonds of similar maturity. The committee had suggested an annual revision but two years ago the government decided to recalibrate rates every quarter (three months). It also removed the 25 bps mark-up for instruments competing with bank deposits, including term deposits, recurring deposits and the Kisan Vikas Patra.

The PPF interest rate is linked to 10-year government bond yield. The 10-year G-sec yield has averaged 7.25 percent in the past three months and is now below 7 percent. On June 20, the 10-year G-sec yield had fallen to a 20-month low of 6.83 percent. The decline in bond yields is bad news for investors in PPF which is currently offering 8 percent.

Investors should brace for a possible 50 bps reduction in the PPF interest rate to 7.5 percent, as a recent ET Wealth story quoted Madan Sabnavis, chief economist, CARE Ratings saying. "Bond yields most probably will soften more and the central bank is likely to cut rates further, the rates on the small savings schemes will only go down."

Although RBI has cut the repo rate thrice this year, the interest rates on small savings schemes were kept unchanged in the April-June quarter and in the January-March quarter rates were kept unchanged for all schemes other than for time deposits.

Small savings interest rates since 2014
small-savings-final
Source: India Post, Department of Economic Affairs

Here is a look at various small savings schemes that are on offer.

Senior Citizen Savings Scheme (SCSS): Senior citizens aged 60 years or above can invest in this scheme to earn regular interest income. Interest on deposits under this scheme is payable quarterly. There is a lock-in period of 5 years for the principal but premature withdrawal is allowed after the completion of one year after paying a penalty. Currently, the maximum that can be invested in this scheme by any individual is capped at Rs 15 lakh.

The scheme qualifies for tax break under section 80C.

Sukanya Samriddhi Yojana (SSY): The scheme comes under the 'Beti Bachao Beti Padhao' campaign. The scheme enjoys exempt-exempt-exempt (EEE) tax status. The investment amount, the interest earned and maturity amount are exempted from tax. Parents or legal guardians can open only one account per girl child and a maximum of two accounts in the name of two different girl children.
The maturity amount is payable after the completion of 21 years. Penalty will be levied if the minimum amount required is not deposited in a single financial year.

Public Provident Fund (PPF): PPF is another popular investment avenue which has EEE tax status. The scheme has a lock in period of 15 years but partial withdrawal is allowed from the seventh year.

5-year NSC VIII Issue: National Savings Certificates (NSC) comes with a lock-in period of five years. Investment in the scheme can be made either singly, jointly or on behalf of a minor. The scheme also qualifies for deduction under section 80C. Here the interest is not paid but rather re-invested. The re-invested interest is also eligible for deduction under section 80C (except for fifth year).

Post office time deposit (POTD): Post office also accepts time deposits, which are similar to a bank FD. A TD can be placed for any of the four tenures- 1, 2, 3, and 5 years. Even a minor above the age of 10 years can invest in the scheme. A five-year time deposit also offers tax benefit under section 80C.

Post Office Monthly Income Scheme (POMIS): POMIS only offers monthly interest payment to investors. Individuals (singly or jointly) or minors aged 10 years and above can invest in the scheme. The scheme has a tenure of five years. The interest will be auto-credited into the investor's savings account at the same post office. The premature withdrawal facility can be availed after the completion of one year by paying some penal amount.

Kisan Vikas Patra (KVP): If you want to double your investment amount, then you can look to invest in KVP. As for other small savings schemes the rate of interest is reviewed quarterly by the government and the time period in which the money invested doubles, therefore, varies with this interest rate. The rate and the time period normally remain fixed for one quarter.

Post office recurring deposits (RD): To invest small fixed amounts of money at regular intervals, one can open a 5-year RD account with the post office. There is no limit on the number of accounts that can be opened. There is a default fee of Rs 0.05 for every Rs 5 of deposit. After 4 regular defaults, the account will be discontinued but can be revived within two months.

Rebate is offered on deposits made six months or more in advance of the due date. Post maturity, the RD account can be extended for another five years.

What should investors do?
Small savings schemes are usually meant for those investors with low risk appetite. Suresh Sadagopan, a Mumbai-based financial planner says that such an investor who has already invested in a small saving scheme should not alter their investments just because the rates are set to go down. "The aim of such an investment capital protection and that you get regular pay-out in the form of interest. This will not change with interest rates coming down. As for someone who is looking to invest and has a low risk appetite, they will not be able to stomach the risk that is there in direct equities or even mutual funds," explains Sadagopan.

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