In my previous article, I have explained the rate hike that took place on June 30, 2023. The Government had increased interest rates on Small Savings Scheme Schemes by 10-30 basis points for July-September Q2 FY 2023-24.

[Read: Small Savings Scheme Schemes: Interest Rates Hiked for July-September Quarter]

Small Savings Schemes are designed to provide low risk and less volatility, they are attractive investment options for investors, and at the same time, it mobilises revenues for national development initiatives.

Small Savings Scheme interest rates, while set by the government, are linked to market yields on government securities at a spread of 0-100 basis points over the yield of these securities of comparable maturities.

According to the Government’s own methodology, when market yields on government securities rise or fall during the reference period, interest rates on Small Savings Schemes should move in the same direction. The Government reviews the interest rates on Small Savings Schemes every quarter considering the nation’s inflation and liquidity condition.

These hikes in small savings rates for the second quarter of FY 2023-24 came amid a pause in the interest rate cycle by the Reserve Bank of India (RBI) and a moderation in yields on government securities.

For the investors of Small Savings Schemes, the government recently announced an increase in the interest rates for the third quarter of the current financial year.

Hike in Interest Rates on Small Savings Schemes for October-December Q3 FY 2023-24:

The Government, on September 29, 2023, raised interest rates on select Small Savings Schemes by 20 basis points for the October-December quarter.

The finance ministry made this announcement via a circular issued on September 29, 2023.

For the third quarter of the financial year 2023-24, starting from October 01, the Government of India has decided to retain the interest rates from the previous quarter on various Small Savings Schemes keeping it unchanged.

Here’s the list of revisions on rates of interest of various Small Savings Schemes for Q3 FY2023-24 starting from October 01, 2023 and ending on December 31, 2023:

Small Savings Scheme Instrument Rate of Interest from Apr – June
Q1 FY 2023-24
Rate of Interest from July – Sept
Q2 FY 2023-24
Rate of Interest from Oct – Dec
Q3 FY 2023-24
Savings Deposit 4.0% 4.0% 4.0%
Post Office 5-year Recurring Deposit 6.2% 6.5% 6.7%
Post Office Monthly Income Scheme 7.4% 7.4% 7.4%
Post Office Time Deposit (1 year) 6.8% 6.9% 6.9%
Post Office Time Deposit (2 years) 6.9% 7.0% 7.0%
Post Office Time Deposit (3 years) 7.0% 7.0% 7.0%
Post Office Time Deposit (5 years) 7.5% 7.5% 7.5%
Senior Citizens' Saving Scheme (SCSS) 8.2% 8.2% 8.2%
Sukanya Samriddhi Yojana (SSY) 8.0% 8.0% 8.0%
National Savings Certificate 7.7% 7.7% 7.7%
Public Provident Fund (PPF) 7.1% 7.1% 7.1%
Kisan Vikas Patra (KVP) 7.5% (115 months) 7.5% (115 months) 7.5% (115 months)

(Source: DEA, Govt of India

The Small Savings Instruments on which interest rates have been hiked is Post Office 5-year Recurring Deposit from 6.5% to 6.7% for October to December. This is the only scheme for which the centre has hiked the rates by 20 basis points.

The interest rates for all other Small Savings Schemes such as Senior Citizen’s Saving Scheme (SCSS), Sukanya Samriddhi Yojana, National Savings Certificates (NSC), Kisan Vikas Patra (KVP) and Public Provident Fund ((PPF), remain unchanged and offer the same interest rate as in the July-September 2023 quarter.

The centre has not changed the interest rate on the extremely popular Public Provident Fund since the April-June 2020 quarter, when it was reduced to 7.1% from 7.9%

With this revision, the interest rates on these Small Savings Schemes now range from 4% to 8.2%, which is the highest offered on Senior Citizens Savings Scheme (SCSS).

Government bond yields rose, with five-year bond yields up around 24 basis points in June-August 2023, which is the reference period for small savings interest rates for October-December quarter.

As a result, the rise in the interest rate on the Post Office 5-year Recurring Deposit broadly mirrors the movement of the market for government securities. Given that returns on government assets increased everywhere, it is puzzling why interest rates on other small savings plans have not changed.

In comparison to the 10-year bond rate, which increased by about 18 basis points between June and August 2023, the yield on the government’s 364-day Treasury bill increased by 14 basis points over the same period.

Should one consider investing in Small Savings Schemes?

Since May 2022, the Reserve Bank of India (RBI) has started raising the key rates. The effect has been that, banks begun raising interest rates on Fixed Deposits (FD), which is good news for FD investors who were receiving decadal-low interest rates.

Small Savings Schemes face intense competition from Fixed Deposit Schemes, which are likewise thought of as low-risk investments due to their large increase in interest rates. After keeping the interest rates on the Small Savings Scheme unchanged for nine consecutive quarters, the finance ministry began hiking them in October-December 2022.

Recently, Union Minister of State for Finance, Mr Pankaj Chaudhary in a written reply in Lok Sabha, said: “Prevailing interest rates on Small Savings Schemes are better than those being offered through similar financial instruments being made available by leading Scheduled Commercial Banks. Rates applicable of Small Savings Schemes are being periodically revised.”

Fixed deposits are almost now at par with Small Savings Schemes, but when we consider the sovereign backing on the schemes, attractive tax benefits, as well as focus on low risk and stable returns, investment in Small Savings Schemes at favourable rates could be a better option for investors.

For investors like retirees and senior citizens, with the requirement for regular monthly fixed-income Small Savings Schemes could be a better alternative to FDs.

Investors should take these interest rate revisions for Small Savings Schemes seriously since they won’t be sustainable for long. Some of these Small Savings Schemes also offer tax advantages that may assist investors in reducing their taxable income.

To Summarise…

Remember that despite the Small Savings Schemes’ appealing interest rates and low risk, investors shouldn’t invest all of their funds in them because many of them have poor liquidity due to lengthy lock-in periods.

[Read: Debt Mutual Funds are Now at Par with Fixed Deposits for Taxation]

It is important to take inflation into account as it could reduce the purchasing power of your fixed-income investments and savings. Investors may consider some exposure to equities via mutual funds, combined with investments in Small Savings Schemes, since equities usually outperform inflation over long periods of time. This allocation could withstand the potential risk of rising inflation.

This article first appeared on PersonalFN here

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