Interest Rates of Post office Small Savings Schemes

What are the Interest Rates of Post office Small Savings Schemes like PPF, SCS, MIS etc? Do the interest rates of Post office Small Saving schemes change? When are the changes in the interest rate of  Post office Small Savings Schemes announced? What were the changes in Small Saving Schemes in various quarters? How do changes in post office small savings rates affect your earlier investments in FD, Senior Citizen Schemes etc.

Interest rates of Post Office Schemes are as shown in the image below.

Features of Post office Scheme

While PPF and Sukanya Samriddhi Yojana can be opened in various banks and post offices, for other post small saving schemes one needs to have a Post office bank account. The post office now provides online banking and mobile banking, as discussed in our article Post Office :Internet Banking, Mobile Apps and Core Banking Solution

Current Interest Rates of Post Office Small Saving Schemes

In April -Jun 2020 Quarter, the Government had reduced the interest rates on small saving schemes such as PPF, NSC, KVP, SCSS etc. Interest rates on small savings scheme for the various quarters are shown below. But the rates have been kept unchanged after that.

Govt on 31 Mar 2021 had reduced the Interest rates on Post office saving schemes but reversed its decision on 1 Apr 2021.

So Rates that were valid till Mar 2021 will continue till at least 31 Dec 2021, shown in the table below. 

Why did Govt reduce the Post office saving deposit rates?

It was an act of fiscal desperation.

The revised estimate (RE) of the fiscal deficit (FD) for 2020-21 was ₹1,848,655 crore or a staggering 9.5% of India’s GDP. It was 98% higher than the actual FD for 2019-20

The budget estimate (BE) of the FD for 2021-22 is also massive at ₹1,506,812 crores or 6.8% of GDP. Thus, after falling short by ₹1,848,655 crores in the financial year FY2020–21, GoI expects to fall short yet again in 2021-22 by another ₹1,506,812 crores.

What are the Post office Small Saving Schemes?

Small savings schemes are designed to provide safe and attractive investment options to the public and at the same time to mobilize resources for development. The National Savings Schemes (NSSs) regulated by the Ministry of Finance offers the complete security of investment combined with good returns. These schemes are operated through post offices and banks, public sector and private throughout the country. It is estimated that nearly $137 billion or over Rs. 9 lakh crore are currently tied up in small savings schemes.  These schemes also act as instruments of financial inclusion especially in the geographically inaccessible areas due to their implementation primarily through the Post Offices, which have reached far and wide in India. Interest Rates on Small Saving Schemes are market-linked ie they are related to the G-Secs.

Some of the popular Small Saving Schemes are as follows.

Comparison of the various Post office savings schemes 

The table below compares the various Post office saving schemes. Remember that from 1 Apr 2020, the income tax slabs have been restructured in Union Budget 2020-21. Now taxpayer has a choice to Take Deductions and stick with the old tax slabs or not take deductions and opt for new tax slabs. So if you are investing in Post office saving schemes for saving tax read our article Old or New Tax Regime to choose with Calculator for Income Tax for FY 2020-21

Features of Post office Scheme

Saving Schemes and G-Secs

From 2011 Interest Rates of Post Office Small Saving Schemes are market-linked to G-Sec and are above the interest rate of G-Sec by a spread. So what is G-Sec and Spread?

G-Secs or Government securities are sovereign debt obligations of the Government of India. These form a part of the borrowing program approved by the parliament in the ‘union budget’. Government raises short-term and long-term funds by issuing these securities. G-Secs are issued by the Reserve Bank of India on behalf of the Government of India.  RBI’s Government Securities Market in India – A Primer covers it in detail.

• Government securities include central government & state government securities, Treasury bill and government-guaranteed bonds.
• The terms of government securities range from 2 to 30 years
• Coupon or Interest offered on government securities are either pre-determined by RBI or arrived through competitive bidding or auction process.
• Coupons which are fixed, paid out semi-annually to the holder of the security.

What is Spread?

The spread is the difference between two similar measures. In the stock market, for example, the spread is the difference between the highest price bid and the lowest price asked. With fixed-income securities, such as bonds, the spread is the difference between the yields on securities having the same investment grade but different maturity dates. For example, if the yield on a long-term Treasury bond is 6%, and the yield on a Treasury bill is 4%, the spread is 2%. The spread may also be the difference in yields on securities that have the same maturity date but are of different investment quality. For example, there is a 3% spread between a high-yield bond paying 9% and a Treasury bond paying 6% that both come due on the same date.

Spreads are generally described in basis points, which is abbreviated bps and pronounced beeps. One percentage point is equal to 100 bps. So if Bond X is yielding 5% and Bond Y is yielding 7%. The yield spread is 2%. A bond trader would say that the yield spread between the two bonds is 200 bps.

Interest Rates of Post Office Small Saving Schemes

Interest Rates of Post Office Small Saving Schemes are market-linked to G-Sec and are above the interest rate of G-Sec by a spread. So what is G-Sec and Spread?

Before 2011, rates on these small savings were fixed. The interest rates on Post Office Small Saving Schemes decided by the government, remain unchanged for years.  A committee headed by Shyamala Gopinath, former deputy governor of the Reserve Bank of India, had recommended that the rates on small saving schemes except for post office accounts, be reviewed every year and linked to rates on government securities (G-Secs) of similar maturity. Returns on post office small savings instruments were linked to the market in 2011, ie the returns on the Small saving schemes will fluctuate with the rise and fall in interest rates and since then have been adjusted annually.

For example, The interest rate on PPF has a markup of 25 basis points over and above the G-Sec rate (Govt Bonds rate). So, if comparable maturity G-sec rate is say 8.5% then the interest rate on PPF will be determined as 8.75%. (One Basis Point is equivalent to 0.01%)

So investment in the small saving schemes will fetch higher returns in a high-interest regime. To protect investors from large volatility, the rates will not be changed by more than 1 percentage point.  Generally, G-secs yields rise in a tighter liquidity environment and fall in case of ample liquidity. The interest would also depend on the Reserve Bank of India. In a high-interest rate regime, yields on G-Secs are higher and are lower during the low-interest rate regime.

The following image shows the movement of 10 year Govt Yield Bonds. 10 year Bond yield on 18 Jun 2020 was 5.83% while on 18 Jun 2019 was 6.89%.

India 10 years Govt Yield bonds over the years

The image below shows how PPF Interest rates have changed over the years.

PPF Interest rate since 1968

How do changes in the interest rates of Post Office Saving Schemes affect investors?

The interest rates on the schemes will change but how does it affect the investors. In schemes like senior citizen savings scheme, NSC, KVP, etc, the new rates are applicable only for new customers.  You are locked at the rates at which you buy.  In other products like PPF,  the lowered rates will be applicable for the entire accumulated corpus and not just for the new investments. So if the rates are going down after as on 1 Jan 2017, you can buy NSC, KVP and Senior Citizen Scheme at new rates. 

Why did Government bring the Changes in the Post office Small Saving Schemes Rates from 1 Apr 2016?

Due to the substantial cut in policy rates by the Reserve Bank of India in the past one year, there was a demand to revise the rates of small savings schemes. Official Press Release Interest Rates of Small Saving Schemes to be recalibrated w.e.f. 1.4.2016  says

The small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India.  In the context of easing the transmission of the lower interest rates in the economy, the Government also has to take a comprehensive view on the social goals of certain National Small Savings Schemes.  Accordingly, it has been decided that the following shall be implemented with effect from 1.4.2016 with regard to National Savings Schemes:

The above changes have been brought with the objective of making the operation of National Saving Schemes market-oriented in the interest of over all economic growth of the country, even while protecting their social objectives and promoting long term savings.

What should you do after changes in interest rates of post office Small Saving Schemes?

Though interest rates on post office deposits have been reduced they are higher than the Fixed Deposits offers by leading banks. So even after interest rate reduction, small saving schemes offer better investment opportunity than bank fixed deposits. However, one needs to keep in mind that both small saving schemes and bank fixed deposits attract tax chargeable as per tax slab.

WILL FDS IN WHICH YOU HAVE INVESTED EARLIER AT THE HIGHER RATE WILL ALSO BE REDUCED TO THE NEW RATE?

An FD is a contract between the person who’s investing in the FD and the institution that is accepting the FD. Under this contract, the terms and conditions set at the start of the FD can not be changed unless such terms for change were there in the contract in the first place. The terms and conditions for the FDs under senior citizen schemes do not have any scope for change, including the rate of interest. So if you had invested in a senior citizen scheme before April 1, 2016, the rate of interest at which you started your FD will not change. However, when that FD matures and you want to reinvest the amount in the same instrument in that case you will get the new rate.

Old or New Tax Slabs?

The income tax slabs have been restructured in Union Budget 2020-21. Now taxpayer has a choice to Take Deductions and stick with the old tax slabs and not take deductions and opt for new tax slabs. Which one should one choose? Details in  Old or New Tax Regime to choose with Calculator for Income Tax for FY 2020-21

Choose Old or New tax slabs in FY 2020-21

Video on Post office small saving schemes

This video gives an overview of the post office saving schemes


Related Posts:

Do you invest in the Small Saving Schemes? If yes which one?