Small saving schemes that remain attractive despite the interest rate cut

Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana and PPF continue to be attractive

The government reduced interest rates on small savings schemes (barring savings deposits) by 10 basis points last week. Senior citizens and other conservative investors, who flock to these instruments for sovereign guarantee, should stick to the more attractive small savings instruments, despite the cut.

Interest rates of small savings schemes are linked to the yields on government bonds of a similar maturity (though the government exercises considerable discretion in deciding them). During the April-June quarter, the 10-year G-Sec yield fell by about 40 basis points. The Reserve of India (RBI) has also cut the benchmark repo rate thrice in succession by a cumulative 75 basis points. These developments, and the need to facilitate transmission of rates, have led the government to cut small savings rates. However, to shield retail investors, it has cut them by far less than the decline in government bond yields warranted.

The Senior Citizens Savings Scheme (SCSS) will pay 8.6 per cent after the cut. “It remains the best rate that senior citizens can get on a debt instrument of a similar tenure (five years),” says Mumbai-based financial planner Arnav Pandya. They will get Section 80C benefit in this scheme. Interest income is taxable. However, senior citizens can use Section 80TTB deduction to lower their tax liability. Interest income of up to Rs 50,000 from banks, co-operative banks and post office deposits can be deducted.

Sukanya Samriddhi Yojana (SSY), too, will remain attractive. Parents who wish to save for their girl child’s education or marriage will find its 8.4 per cent tax-free return appealing. The scheme has a long tenure of 21 years, and investors should be prepared for limited liquidity.

Public Provident Fund (PPF), which will offer a tax-free interest rate of 7.9 per cent, will continue to be used by investors to make the debt allocation in their retirement portfolio. “Once you complete 15 years and extend the tenure, PPF becomes extremely flexible. You can put in money at any point and withdraw it whenever you like,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor. While both Employees Provident Fund (EPF) and PPF enjoy EEE (exempt-exempt-exempt) tax status, PPF offers retirees an advantage. “You cannot keep contributing to EPF after retirement. And if you do not withdraw your EPF corpus after retirement, you will have to pay tax on the interest you earn. But you can continue contributing and withdrawing from PPF life-long, and the income remains tax-free,” adds Raghaw.

All the three products mentioned above – SCSS, SSY and PPF – offer Section 80C tax benefit.  They are the best products in the small savings basket, according to experts. 

National Savings Certificate (NSC) offers a return of 7.9 per cent. However, the interest income is taxable. The interest earned gets reinvested and is also eligible for Section 80C benefit. The question mark, however, is whether you will be able to enjoy this benefit, since many investors would exhaust their ~1.5 lakh limit with other instruments.

The case for investing in time deposits and the monthly income scheme is not strong. “The rates are not very attractive. Senior citizens especially can get slightly better rates from bank fixed deposits of comparable tenure. And they offer no tax benefits,” says Pandya.

Debt funds can potentially outperform many small savings schemes on post-tax returns due to the indexation benefit they enjoy after three years. But experts are currently wary of asking conservative investors to invest in them. “Given the defaults and downgrades that are taking place, conservative investors, especially senior citizens, may stay away from long-duration debt funds for the present, and at best invest in liquid funds or overnight funds,” says Nikhil Banerjee, co-founder, Mintwalk.