What Does Rate Hike on These Small Savings Schemes Mean to Investors

Small Savings Schemes are a set of savings instruments managed by the central government to encourage all residents, regardless of age, to save consistently. These schemes not only provide returns that are generally higher than bank fixed deposits with minimal risk and volatility but also come with a sovereign guarantee and tax benefits. Small savings schemes can be grouped under 3 categories as below:

1. Post Office Deposits

It includes savings, recurring, and time deposits with 1, 2, 3 and 5-year maturities and the monthly income account.

• Savings Deposit - It can be opened individually or jointly with an initial investment of Rs 500.

• Recurring Deposit - It matures after 60 months from the date of opening. It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.

• Post Office Time Deposits - They are similar to bank FDs with tenures of 1, 2, 3 and 5-year maturity. A minimum investment of Rs 1,000 is required to open a time deposit. Investments under the 5-year time deposit up to Rs 1.5 lac further qualify for benefit under section 80C of the Income Tax Act, 1961.

• Monthly Income Account Scheme - It matures in 5 years from the date of opening. This scheme offers income to depositors in the form of monthly interest payments. A maximum of Rs 4.5 lacs can be deposited in a single account and Rs 9 lacs in a Joint Account.

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2. Savings Certificates

These are the two investment options under this category.

• National Savings Certificate - It holds a lock-in period of 5 years. The interest that is earned is reinvested into the scheme automatically every year. The NSC also qualifies for tax savings under Section 80C of the Income Tax Act, 1961.

• Kisan Vikas Patra - It is open to everyone and doubles your one-time investment at the end of 124 months. The minimum investment amount is Rs 1,000, while there is no upper limit.

3. Social Security Schemes

This includes Public Provident Fund, Senior Citizens Savings Scheme (SCSS) and the Sukanya Samriddhi Yojana.

• Public Provident Fund Scheme (PPF) - It is a popular savings option for long-term goals like retirement and qualifies for tax benefits under Section 80C of the Income Tax Act. Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years. The accumulated amount and interest earned are exempt from tax at the time of withdrawal.

  [PPF Calculator] / [Retirement Calculator]

• Sukanya Samriddhi Account Scheme - It was launched in 2015 under the 'Beti Bachao Beti Padhao' campaign exclusively for a girl child. Dedicated to the financial well-being of the girl child, the account is opened and operated by parents or guardians for girl children below the age of 10 years. The minimum deposit required is Rs 250, and the maximum amount allowed is Rs 1.5 lac per financial year, and it is eligible for tax benefits under section 80C. The deposit can be made in the account till the completion of 15 years from the opening of the account, and it has a lock-in period of 21 years.

• Senior Citizen Savings Scheme - The SCSS account can be opened by anyone who is over 60 years of age.  It is a government-backed retirement benefits scheme which allows senior citizens resident in India to invest a lump sum, individually or jointly, in a single payment and get regular income along with tax benefits. An individual can make a minimum deposit of Rs 1,000 in SCSS and can invest up to a maximum of Rs. 15 lakhs or the amount received on retirement, whichever is lower. The maximum tenure of the senior citizen savings scheme is 5 years, which can be further extended for 3 years from the date of maturity.

These time-tested and safe mode of investments don't offer quick returns but are safer when compared to market-linked schemes.

How do the small savings scheme operate?

The money deposited in these schemes by individuals is directly sent to the government and deposited in the National Small Savings Fund (NSSF). The money in the fund is used by the central government to finance its fiscal deficit. The depositors get an assured interest on their money. Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis. Typically, small saving rates are linked to yields on benchmark government bonds, and the revisions follow the movement in G-Sec yields. However, despite the movement of G-Sec yields in the past two years, the interest rates on small savings schemes have remained unchanged by the government since the first quarter of 2020-21.

Hike in interest rates on small savings schemes for Q3 FY 2022-23:

The government will monitor the country's liquidity position and inflation before deciding on the interest rates of small savings schemes. In the previous review, the government kept the interest rates unchanged for the July-September 2022 quarter. The Finance Minister Ms Nirmala Sitharaman had said, "The rates of interest on various small savings schemes for the second quarter of the financial year 2022-23, starting from July 1, 2022, and ending on September 30, 2022, shall remain unchanged from those notified for the first quarter (April 1, 2022, to June 30, 2022) for FY 2022-23."

After keeping the interest rate on small savings schemes unchanged for over many consecutive quarters, the Finance Minister, on Thursday, September 29, 2022, raised interest rates on small savings schemes by up to 30 basis points (bps) in line with the hardening interest rate in the economy. India's retail inflation in August soared to 7%, as compared to 6.71% in July 2022. The changes in rates have come amid spiralling inflation and a rising interest rate cycle.

*will mature in 124 months.

The new interest rates on some of the small savings schemes will be applicable for the October-December quarter of FY 2022-23. Interest rates on seven schemes were retained, while the hike was affected in five schemes.

Should you invest in small savings schemes?

The interest rates payable on small saving schemes are attractive. When most other fixed income avenues - be it bank fixed deposits or bonds have seen falling interest rates, the small saving schemes saw rates continue at attractive levels. Although most good quality bonds offer negative real yield (nominal interest rate minus rate of inflation) due to rising inflation, the small saving schemes look better given the higher yields. Also, considering the intensified market volatility, many investors would like to stick to high credit quality bonds. Since small saving schemes are backed by a sovereign guarantee, there is low credit risk.

However, do note that even though small savings schemes offer attractive interest rates, do not jump with all your money. Do take your liquidity needs into account, as many of these schemes score low on the liquidity front due to long-term lock-in periods. Additionally, you should consider the rising rate of inflation because it could result in low purchasing power of your savings and fixed income investments. Since equities often beat inflation over a long period of time, some exposure to equities through mutual funds can help you tide over the risk of high inflation.

For instance, if you are looking for intermittent liquidity and have some long-term financial goals, such as funding your retirement corpus, then you may consider investing some money in PPF along with equity mutual funds. Additionally, if you intend to save money for your daughter's education over more than ten years, then complimenting Sukanya Samriddhi Yojana with systematic investment plans (SIP) in mutual funds makes sense.

Therefore, in order to retain a promising and secure financial future, you, as an investor, need to make wise investments in lucrative opportunities. On the other side, you also need to improve your financial knowledge in order to make informed financial decisions and to better understand and be financially conscious of such changes in various investment opportunities.

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Warm Regards,
Mitali Dhoke
Research Analyst