PPF, NSC and other post office schemes interest rates remain unchanged

For the quarter 1 of FY 2020-21, the government had slashed rates of small savings schemes by 0.7-1.40%. If the government had cut rates for this quarter as well in the similar fashion, then PPF would have fetched returns below the 7 per cent mark...

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The interest rates on small savings schemes are reviewed every quarter by the government.
There is some good news for fixed income investors: the government has kept the interest rates on small savings schemes or post office schemes unchanged for the July-September quarter of FY 2020-21. This was announced via a Department of Posts circular dated July 1, 2020.

According to the circular, in the second quarter of FY 2020-21, the Public Provident Fund (PPF) will continue to earn 7.10 per cent. The Senior Citizens Savings Scheme (SCSS) will continue to earn 7.40 per cent and post office time deposits will fetch 5.5-6.7 per cent. The interest rates will be applicable for the period starting July 1, 2020 to September 30, 2020.

Here is a look at the interest rates on various small savings schemes for the second quarter of FY 2020-21:


Interest rates of post office deposit schemes
Instrument

Interest rate (%) from July 1, 2020

Compounding frequency

Savings deposit

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: Department of Posts circular

Good news for investors
For the previous quarter, that is, April-June 2020, the government had slashed rates of small savings schemes by 70-140 bps (100 bps = 1 per cent). If the government had cut rates for the second quarter as well in the similar fashion, then an investor-favourite instrument like the PPF would have fetched returns below the 7 per cent mark - a 46-year low.

It is not just low returns on small savings schemes that have been hurting fixed income investors for some time now. With the Reserve Bank of India (RBI) cutting key rates over the past year or so, banks, too have been reducing interest rates on fixed deposits. Due to this, certain FD tenures are now fetching returns lower than even savings accounts.

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.
With fixed income investors being in such dire straits, the government keeping interest rates unchanged on small savings schemes will offer some relief.

Post the announcement, post office savings account is offering interest rate of 4 per cent per annum which is higher or equivalent than the interest rate offered by leading banks on their savings accounts.

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How interest rates are set for small savings schemes
The interest rates on small savings schemes are reviewed every quarter by the government. The formula to arrive at the interest rates for small savings scheme was given 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.
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