Amid all the gloom and doom, here is some good news for fixed income investors: For yet another quarter the government has kept the interest rates of various small savings schemes unchanged. Schemes such as the Public Provident Fund (PPF), National Savings Certificate (NCS) etc will continue to fetch the same interest rates for the quarter ending December 2020 as they did in the previous quarter, i.e., July-September 2020.
The finance ministry made this announcement via a circular dated September 30, 2020. As per the circular, the PPF will continue to earn 7.10 per cent and the Senior Citizen Savings Scheme (SCSS) will earn 7.40 per cent as before. Similarly, post office time deposits will continue to fetch between 5.5 per cent and 6.7 per cent depending on the tenure of deposits.
The interest rates on post office deposit schemes are scheduled to be next reviewed towards the end of December 2020.
Here is a look at the interest rates on various small savings schemes for the third quarter of FY 2020-21.
Interest rates on post office saving schemes
| Instrument | Interest rate (%) from October 1, 2020 | Compounding frequency |
| Savings Account | 4 | Annually |
| 1 year Time Deposit | 5.5 | Quarterly |
| 2 year Time Deposit | 5.5 | Quarterly |
| 3 year Time Deposit | 5.5 | Quarterly |
| 5 year Time Deposit | 6.7 | Quarterly |
| 5-year Recurring Deposit | 5.8 | Quarterly |
| 5-year Senior Citizen Savings Scheme | 7.4 | Quarterly and Paid |
| 5-year Monthly Income Account | 6.6 | Monthly and Paid |
| 5-year National Savings Certificate | 6.8 | Annually |
| Public Provident Fund | 7.1 | Annually |
| Kisan Vikas Patra | 6.9 (will mature in 124 months) | Annually |
| Sukanya Samriddhi Yojana | 7.6 | Annually |
Source: Finance ministry circular Relief for fixed income investors
In the first quarter of the current financial year, i.e., April-June 2020, the government had slashed rates of post office deposit schemes by 70-140 bps (100 bps=1 per cent). If the government had cut interest rates by even 20 bps (0.20 per cent) in this review, then the PPF interest rate would have gone below the 7 per cent mark.
The government maintaining interest rates on small savings schemes in this review is also a relief because interest rates on bank fixed deposits (FDs) have been on a downward trajectory for more than a year now.
For instance, after the State Bank of India’s (SBI) latest rate cut on one-year FDs by 20 bps, the one-year FD now fetches 4.90 per cent, down from 5.10 per cent earlier. (The new rates are effective from September 10, 2020). Compared to this, the interest rate on one-year post office time deposit is 5.5 per cent — 60 bps or 0.60 per cent higher than SBI’s one-year FD.
Here’s the math: An investment of Rs 1 lakh in SBI’s FD after one year will fetch you Rs 1,04,991 whereas investment in the post office time deposit will fetch Rs 1,05, 614, assuming quarterly compounding. This a difference of Rs 623.
Interest rates on savings accounts, too, have not been spared. A State Bank of India savings account now earns 2.7 per cent per annum (with effect from May 31, 2020). An ICICI Bank savings account with a balance of less than Rs 50 lakh earns 3 per cent per annum (with effect from June 4, 2020). A Kotak Mahindra Bank (a bank whose USP has been its high interest rates on savings accounts, at one point earning 6 per cent) savings account with balance up to Rs 1 lakh now earns 3.5 per cent a year. For balances above Rs 1 lakh, Kotak Mahindra Bank is offering 4 per cent per annum.
How interest rates are set for small savings schemes
The interest rates on small savings schemes are reviewed every three months by the government. The formula to arrive at the interest rates for small savings scheme was suggested by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of different schemes should be 25-100 bps higher than the yields of government bonds of similar maturity.
