Good news for bond investors since the government has kept the interest rates on small savings unchanged for the quarter ending September 30, 2021. The announcement was made by the Ministry of Finance via a circular dated June 30, 2021. This is the fifth quarter in a row that the government has maintained interest rates on various post programs such as the Public Provident Fund (PPF), National Savings Certificates (NSC), Sukanya Samriddhi Yojana ( SSY) and others unchanged. This means that investors in PPF and SSY will continue to receive the same interest rate as in the quarter ending June 30, 2021. New investments in these programs will also earn the same interest rates as in the previous quarter. .

According to the ministry circular, PPF will continue to earn 7.10%, NSC will earn 6.8%, and the post office monthly income plan account will earn 6.6%.

Here is an overview of the interest rates on various small savings plans for the second quarter of fiscal year 2021-22.

Interest rates for postal savings plans

Instrument Interest rate (%) from July 1, 2021 to September 30, 2021 Compound frequency
Savings account 4 Annually
1 year term deposit 5.5 Quarterly
2 year term deposit 5.5 Quarterly
3 year term deposit 5.5 Quarterly
5-year term deposit 6.7 Quarterly
5-year recurring deposit 5.8 Quarterly
5-year Seniors Savings Plan 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 expire in 124 months) Annually
Sukanya Samriddhi Yojana 7.6 Annually

Source: circular from the Ministry of Finance

The debacle of falling savings rates

Recall that on March 31, 2021, the government had indeed announced a decrease in the rates of small savings for the quarter ending June 30, 2021. At the end of the evening of March 31, 2021, the Ministry of Finance had announced that the rates of Interest on Small Savings was sharply reduced from 40 to 110 basis points (100 basis points / bps = 1%) for the first quarter of fiscal year 2021-22. With the fall, interest rates on small savings plans would have been reduced by a total of 110 to 250 basis points in the current year. After this cut, the interest rate on the PPF would have fallen below 7%, the first time since 1974, a low in 46 years.

Then immediately via an early morning tweet, the government announced that the sharp drop in interest rates on small savings plans had been reversed.

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Interest rates for postal systems

Relief for debt investors

The government’s status quo on small savings rates comes just over a month ahead of the RBI’s bimonthly monetary policy review. The apex bank would once again maintain the status quo on policy rates, which is once again a reason to encourage investors in fixed income products.

This is because with the RBI keeping rates unchanged, banks can no longer reduce interest rates on FDs. Some even increased FD rates.

FD, bank savings accounts or small savings plans?

Although banks have not cut FD rates for a few months now, small savings plans, on the whole, continue to earn higher interest rates.

Here’s the math: An investment of Rs 1 lakh in the 1-year SBI FD will earn you Rs 1,04,991 (4.90% interest rate) while the investment in the post office term deposit will earn you Rs 1,04,991 (4.90% interest rate). Rs 1.05,614 (5.5% interest rate), assuming quarterly compounding. This is a difference of Rs 623.

Aside from term deposits, even the interest rates on savings accounts offered by some of the larger banks are lower than the interest rate on Post Office savings accounts.

The Post’s savings account currently offers 4% per annum while SBI offers an interest rate of 2.70% per annum on its savings account. Likewise, ICICI Bank offers 3% per year. Kotak Mahindra Bank offers 3.50% per annum for balances up to Rs 1 lakh and 4% per annum for account balances between Rs 1 lakh and Rs 1 crore. For balances, above Rs 1 crore, the bank offers 3.50% per annum.

How interest rates are set for small savings plans

The government reviews and announces the interest rates on small savings plans every three months. The formula for calculating interest rates on small savings plans was suggested by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of the different regimes should be 25 to 100 basis points higher than the yields on government bonds of similar maturity.

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