There is good news for fixed income investors as the government has decided to keep the interest rates on small savings schemes or post office schemes, unchanged for the quarter ending March 31, 2021. This is the third quarter in a row that the government has kept interest rates on various small savings schemes such as 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 earn the same interest rate as they were earning in the previous quarter, i.e., between October and December 2020. Also, in new investments in the quarter ending March 31, 2021 will get the same interest rates as in the previous quarter.
This was announced by the finance ministry via notification dated Dec 30, 2020. As per the notification, PPF will continue to earn 7.10%, the NSC will fetch 6.8%, and Post Office Monthly Income Scheme Account will earn 6.6%.
Here is a look at the interest rates on various small savings schemes for the fourth quarter of FY 2020-21.
Interest rates on post office savings schemes
| Instrument | Interest rate (%) for January 1, 2021 to March 31, 2021 | Compounding frequency |
| Savings Account | 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 |
Relief for debt investors
The government’s status quo on small savings schemes rates comes close on the heels of the Reserve Bank of India (RBI) keeping key rates unchanged in its December bi-monthly monetary policy. This is overall good news for investors in fixed income products.
That is because with the RBI keeping rates unchanged, banks may not cut interest rates on FDs any further. Banks like the State Bank of India (SBI) have kept FD interest rates unchanged since September 2020. Currently, SBI’s one-year FD interest rate is 4.90%. Then there are some, like Canara Bank, that have announced a hike in FD rates of longer-term tenures of two years plus.
FDs, bank savings accounts or small saving schemes?
Despite banks not cutting FD rates for a couple of months now, small savings schemes are, by and large, still earning higher interest rates.
Here’s the math: An investment of Rs 1 lakh in SBI’s 1-year FD will fetch you Rs 1,04,991 (interest rate of 4.90%) whereas investment in the post office time deposit will fetch Rs 1,05, 614 (interest rate of 5.5%), assuming quarterly compounding. This a difference of Rs 623.
Apart from fixed deposits, even the interest rates on savings accounts offered by some of the bigger banks is lower than the interest rate on the post office savings account.
Post office savings account is currently offering 4% per annum whereas SBI is offering 2.70% per annum interest rate on its savings account. Similarly, ICICI Bank is offering 3% per annum. Kotak Mahindra Bank is offering 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 is offering 3.50% per annum.
How interest rates are fixed for small savings schemes
The government reviews and announces the interest rates on small savings schemes every three months. The formula to calculate the interest rates on small savings scheme was suggested by the Shyamala Gopinath Committee. The committee had suggested that the interest rates on different schemes should be 25-100 basis points (bps) higher than the yields on government bonds of similar maturity.
