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Interest on small saving schemes

Check How Interest in Small Saving Schemes has Fallen

The current COVID-19 pandemic has impacted millions of livelihoods in the country, forcing the government and the RBI to take radical measures to provide relief. The government, on March 21, 2020, announced a drastic cut in the interest rates offered on small saving schemes for the first quarter (April to June 2020). The interest rate on several small saving schemes has been cut between 70 basis points and 140 basis points (100 basis points = 1 percent).

Here's is a look at how much small saving schemes will earn for the quarter starting from April 1, 2020.

InstrumentInterest rate as on January 1, 2020 (in %)Effective interest rate from April 1, 2020 (in %)% changeCompounding frequency
Savings deposit440Annually
1-year Term Deposit6.95.5-1.4Quarterly
2-year Term Deposit6.95.5-1.4Quarterly
3-year Term Deposit6.95.5-1.4Quarterly
5-year Term Deposit7.76.7-1Quarterly
5-year Recurring Deposit7.25.8-1.4Quarterly
5-year Senior Citizen Saving Scheme8.67.4-1.2Quarterly
5-year Monthly Income Account7.66.61-Monthly
5-year National Saving Certificate7.96.8-1.1Annually
Public Provident Fund7.97.1-0.8Annually
Kisan Vikas Patra7.66.9-0.7Annually
Sukanya Samriddhi Yojana8.47.6-0.8Annually

Interest rates on most of these saving schemes were last revised in July 2019, where rates were cut by 10 basis points. Since then, the interest rates have been kept unchanged. The Economic Survey has previously suggested that the interest rates on small saving schemes be reduced to bring them in harmony with the prevailing interest rates in the economy.

The latest interest rate cutback in small saving schemes is undoubtedly bad news for fixed income investors, especially for senior citizens, as they are primarily dependent on interest from investment as a significant source of income. This is mainly because, over the past year, several banks have been reducing fixed deposit interest rates. According to a report issued by Times of India, SBI five-year term deposit is fetching less than 6% for the first time since August 2004. After the RBI cut the repo rate by 75 basis points on March 27, 2020, the bank slashed its FD rates on the same day by up to 50 basis points. After such a cutback, the SBI's one-year fixed deposit will earn 5.2% for regular deposits, whereas senior citizens will earn 6.2%.

How interest rates are set on small saving schemes

The rate of interest on various small saving schemes is reviewed quarterly by the government. Shyamala Gopinath Committee gave the formula to compute the interest rates on saving schemes. The committee has advised that the interest rates of different schemes should be 25 to 100 basis points higher than the yields of the government bonds of similar maturity.

How does this affect you?

The cutback in interest rates on small saving schemes is terrible news for investors, especially senior citizens who are invested in fixed income schemes.

Fixed-income investors, which consist of a large number of senior citizens, will now earn a lower interest income. Moreover, the current outbreak of novel coronavirus makes it worse for senior citizens who will see a drastic drop in their regular income.

Investors across the country widely opt for these saving schemes, and they now may have to revisit their financial portfolio as they will now fetch much lower returns. However, experts suggest that the current economic situation may have accelerated interest rate reduction in such saving schemes, but added that a slump was in line with market rates.

In light of the recent interest rate reduction, experts have recommended investors in saving schemes to diversify their investment portfolio and look at balanced or hybrid funds, which offer more than one form of investment security.