The Reserve Bank of India (RBI) has thus far cut policy rates thrice this calendar year aided by mellowed inflation. Lower rates have been passed by banks after an initial prodding done by RBI, and as result interest rates offered on term deposits too have moved down.
 

But interestingly, Small Saving Schemes (SSS) are yet offering better interest rates, yielding investors better returns.
 

Scheme Name	Rate of Interest p.a.	Tax benefit
Post Office Monthly Income Scheme (POMIS)	8.40%	Nil
Kisan Vikas Patra (KVP)	8.70%	Nil
Public Provident Fund (PPF)	8.70%	Deduction u/s. 80C
5-Year NSC VIII Issue	8.50%	Deduction u/s. 80C
10-Year NSC IX Issue	8.80%	Deduction u/s. 80C
Post Office Time Deposits (POTD)	8.40% - 8.50%	Deduction u/s. 80C
5-Year Recurring Deposit	8.40%	Nil
Savings Deposits	4.00%	Nil
Sukanya Samriddhi Yojana (SSY)	9.20%	Deduction u/s. 80C
Senior Citizens Savings Scheme (SCSS)	9.30%	Deduction u/s. 80C

(Source: PersonalFN Research)  

All the same, it may not be too long before interest rates are pulled down. The finance ministry is planning to review its small savings schemes later this month.
 

But can the finance ministry afford it?

Well, the present rates of interest offered on respective SSS, is resulting in high borrowing cost for the Government. Besides, it is impeding banks from lower lending rates as they fear retort from deposit holders while some other fixed income investment avenues are offering better interest rates.

Hence the Government would need to proceed rather cautiously taking views from all stakeholders. It will not be an easy decision, because reducing interest may have impact on mobilisation as investors will be dissuaded.

As a result the financial inclusion drive of the Government may also hinder. The opposition is anyway looking for an opportunity to critique the Government, more so in matters which have an impact on the aam aadmi after much propagation on acche din (or a better tomorrow).

The Government has already budgeted Rs 22,408 crore from small savings for its fiscal needs in the fiscal year 2015-16. To PersonalFN it appears unlikely that interest rates on all SSS will be reduced sharply. But there may be some alteration to reflect shift in the economy. At present interest rates on SSS are benchmarked to Government Securities (G-Sec) yields and revised annually. Probably they may amend the frequency of the revision to quarterly or half-yearly.

Notwithstanding the above, while you invest keep in mind your financial goals, your age, risk appetite, investment time horizon, liquidity needs, real rate of returns you would earn and the tax implication to make a prudent choice amongst a host of investment avenues.

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rschennai@gmail.com Aug 03, 2015 I have always like articles on SSS scheme, I am very conservative in that I love risk free secured and government protected funds. Regards Ram

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