Revision of Interest Rates on Small Savings Schemes for the Quarter April-June 2023
April 4, 2023 Mutual Fund
Given their government backing, small savings schemes are popularly considered as a low-risk investment alternative. The revenue collected through these schemes are utilised to fund the central government’s fiscal deficit. Small savings schemes, such as post office 1-year to 3-year time deposits and 5-year recurring deposits, are savings vehicles managed by the government and designed to encourage citizens to save consistently. It also includes saving certificates such as National Saving Certificates and Kisan Vikas Patra, Sukanya Samriddhi Account, and Senior Citizens Savings Scheme.
While determined by the government, small savings interest rates are tied to market yields on G-secs with a lag. They are reviewed, fixed on a quarterly basis at a spread ranging from 0-100 basis points over and above G-Sec yields of comparable maturities, according to the Reserve Bank of India. Yet, interest rates on small savings have not consistently mirrored market rate movements. The government will keep an eye on the nation’s inflation and liquidity condition before deciding on the interest rates of small savings schemes.
Revision of Interest Rates on Small Savings Schemes for Q1 FY 2023-24:
On March 31, 2023, the Central Government announced a rate hike again on various small savings schemes, including the Senior Citizen Savings Scheme, Sukanya Samriddhi Account Scheme, Monthly Income Savings Scheme, National Savings Certificate, Kisan Vikas Patra, and all post office time deposits, for the April to June quarter of the fiscal year 2023-24.
With the rise in government bond yields, the latest revision of interest rates for small savings schemes was anticipated. Small savings rates are tied to the yields on government bonds of the same duration and are reset every quarter. Small savings rates have been raised upwards as bond yields have risen dramatically. The government has revised the interest rates on small savings schemes for the 3rd time in the last 9 months.
[Read: Interest Rates for Small Savings Schemes Hiked Again! Here’s All You Need to Know]
Here’s the list of revision of interest rates on small savings schemes for the April to June 2023 quarter:
| Small Savings Scheme Instrument | Rate of Interest from Oct – Dec 2022 Q3 FY 2022-23 | Rate of Interest from Jan – Mar 2023 Q4 FY 2022-23 | Rate of Interest from Apr – June 2023 Q1 FY 2023-24 |
| Senior Citizens' Saving Scheme (SCSS) | 7.6% | 8.0% | 8.2% |
| Sukanya Samriddhi Yojana | 7.6% | 7.6% | 8.0% |
| National Savings Certificate | 6.8% | 7.0% | 7.7% |
| Public Provident Fund (PPF) | 7.1% | 7.1% | 7.1% |
| Kisan Vikas Patra (KVP) | 7% (123 months) | 7.2% (123 months) | 7.5% (115 months) |
| Post Office Savings Account | 4.0% | 4% | 4% |
| Post Office Recurring Deposit | 5.8% | 5.8% | 6.2% |
| Post Office Monthly Income Scheme | 6.7% | 7.1% | 7.4% |
| Post Office Time Deposit(1 year) | 5.5% | 6.6% | 6.8% |
| Post Office Time Deposit (2 years) | 5.7% | 6.8% | 6.9% |
| Post Office Time Deposit (3 years) | 5.8% | 6.9% | 7.0% |
| Post Office Time Deposit (5 years) | 6.7% | 7.0% | 7.5% |
(Source: DEA, Govt of India)
As you can see, the most significant rise was in the interest rate of the National Savings Certificate (NSC), which will now pay 7.7%, up from 7%, for the period April 01 to June 30, 2023. While interest rates for popular PPF and savings deposits have been retained at 7.1% and 4%, respectively, there has been an increase between 0.1% and 0.7% in other saving schemes. Other saving plans have increased by 0.1% to 0.7%. Whereas the Post Office savings account offers 4% per year, SBI’s savings account offers 2.70% per annum, and ICICI Bank and HDFC Bank offer 3-3.5% per annum.
In September 2022, the Centre increased the interest rates of these small savings schemes by 10-30 basis points for the October-December quarter for the first time after keeping it unchanged for more than 2 years. Further, the interest rates for government-backed small savings schemes, like Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Post Office Savings Account and Post Office Recurring Deposit were not revised for the January-March quarter in 2023. However, amongst these, the interest rate for Sukanya Samriddhi Yojana and Post Office Recurring Deposit has been hiked in the recent revision of rates for the April-June quarter of FY 2023-24.
What does the revision of interest rates on Small Savings Schemes mean to investors?
These government-backed small savings schemes provide safe and enticing investment options while also mobilising revenues for national development initiatives. Most individuals invest in some kind of small savings scheme in an effort for wealth creation.
Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis. Presently, the interest rates on small savings schemes are appealing. However, there has been a significant rise in interest rate of Fixed Deposit schemes as well, which as a low-risk investment offers a strong competition to the small savings schemes. For example, State Bank of India (SBI) offers interest rate up to 7% on fixed deposit tenure of 3 to 5 years, HDFC Bank offers interest rate 7.50% from 18 months to 5 years and ICICI Bank offers interest rate 7.50% from 2 to 5 years and so on.
Although FDs backed by large banks are almost now at par with small savings schemes, when we consider the sovereign backing on the schemes, attractive tax benefits, as well as focus on safe and stable returns, investment in small savings schemes at favourable rates can be a better option. Considering the requirement for regular monthly fixed-income small savings scheme could be a better alternative to FDs for investors like senior citizens and retirees. Such interest rate revisions for small savings schemes should be considered earnestly by investors, as these interest rates won’t be sustainable for a long time.
As a result, by investing in qualifying tax-saving schemes, investors can reduce their taxable income. For example, the younger generation prefers to begin with PPF, which has been one of the good tax-saving investments, as well as a form of secured debt investment. Furthermore, given the increased market volatility, many investors would choose to adhere to High Credit Quality Bonds. While small savings schemes are backed by a sovereign guarantee, there is little credit risk, and locking in your money at the revised rate could be beneficial.
However, keep in mind that although Small Savings Schemes offer appealing interest rates, you should not invest all of your money in them. Consider your liquidity requirements, as many of these schemes have poor liquidity due to long-term lock-in periods. Furthermore, you should consider the rising rate of inflation, which may result in a loss of purchasing power for your savings and fixed-income investments. Since equities frequently outperform inflation over extended periods of time, some exposure to equities via mutual funds, along with investments in Small Savings Schemes, can help you weather the risk of high inflation.
This article first appeared on PersonalFN here
