Market linked interest rates for small savings schemes - H&R Block| Blog

Market linked interest rates for small savings schemes

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Market linked interest rates for small savings schemes

From a long time, RBI and banks have complained about higher interest rates offered by PPF and other small savings schemes which forced them to offer high interest rates on deposits to compete with them. Government finally heard their outcry by slashing the interest rates offered by several of those schemes. A lot of people were upset when the government pulled down the rates of small savings schemes.

Earlier, government used to modify interest rates on small savings scheme annually. The rates were recalculated and notified in March for upcoming Financial Year. But in February 2016, government decided to adjust the interest rates on a quarterly basis. The effective interest rates for the first quarter of the year 2016-17 were announced in March 2016. The interest rates for the same are given below. Rates of all these investment options have been chopped down by the government.

 

Small Investment Schemes New Rate of Interest Old Rate of Interest Change
Public Provident Fund 8.1% 8.7% -0.6%
5 years National Savings Certificate 8.1% 8.5% -0.4%
Sukanya Samriddhi Account 8.6% 9.2% -0.6%
Kisan Vikas Patra 7.8% 8.7% (will mature in 110 months) -0.9%
5 Years time deposit 7.9% 8.5% -0.6%
5 Years recurring deposit 7.4% 8.4% -1%
3 Years time deposit 7.4% 8.4% -1%
2 Years Time Deposit 7.2% 8.4% -1.2%
1 Year Time Deposit 7.1% 8.4% -1.3%

 

Reason for rate cuts:

Government has made the rates of small savings schemes more aligned with the market. These schemes have always been lucrative with people. As a result, saving schemes presented by banks had to compete aggressively with small saving schemes to attract savers. The result is also reflected through higher lending rates charged by banks. RBI had cut its rates previously too but banks failed to forward them to borrowers due to tough competition from small saving schemes. As a result government was forced to take this step in order to signal RBI to slash the rates further. Government expects to promote economic growth by enabling banks to curtail their lending and deposit rates.

Impact on common man:

Rate cuts have been done by the government at a crucial time when service tax is going up. Middle class will earn less from some of the most popular deposit schemes but not all the doors have been closed for them. ELSS is still an attractive investment option along with shares and mutual funds.  In the short run, government’s step might be looked in a bad light by the middle class saver but in the long run it will make the economy more efficient. If government’s move yields desired results then citizens will find it easier to avail loans as banks will be able to cut their lending rates. As a result, availing a home loan or financing higher education will become easier. Not only this, even government will be a huge beneficiary of reduction in interest rates. It borrows 5 lakh crore annually and this move can lead to big savings on their part which can be used for the development of infrastructure and other social areas.

HRBlockIndia
HRBlockIndia
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.

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