The Central Government is thinking of reducing the interest rates of small scale savings schemes like post office deposits, National Savings Scheme and Public Provident funds. The proposed move is part of the policy decision to make the interest rates of small scale savings schemes on par with the interest rates prevalent in the market over the years.
There is a possibility of the interest rates being reduced at any point of time during the New Year and under the circumstances, it is pertinent to know the impact this will make on the deposits made by common man.
Last year, the Repo rates were reduced by 1.25 per cent. However, the banks were reluctant to transfer the benefits of lower interest rates to the customers who availed fresh loans. With high interest rates prevailing for small scale saving schemes, the banks are unable to reduce interest rates while accepting new deposits. The banks have taken the stance that under the prevailing circumstances they cannot reduce interest rates for new loans.
At present, a post office deposit scheme with tenure of one year will give an investor an interest of 8.4 per cent. The Sukanya Smrithi scheme with tenure of 10 years for girl child will give an interest of 9.2 per cent while the Public Provident Fund Scheme will give an interest of 8.7 per cent.
The government mobilizes funds from the market through sale of bonds. The government is now thinking of making the interest rates of government bonds as basic interest rate for small scale saving schemes. With most of the deposits in banks having tenure of less than three years, it is unlikely that the interest rates for small scale saving deposits with tenure of five years will be reduced. It is likely that interest rates of small scale saving deposits with shorter tenures will be reduced between 0.5 to one per cent.
If interest rate of public provident fund is reduced by 0.7 per cent, a Rs one lakh deposit with a tenure of five years will see a reduction of Rs 5000 in the maturity amount. It is unlikely that the interest rates for Senior Citizens Saving Schemes will be reduced. The Sukanya Smrithi scheme will also be spared from interest lower rate. There is even a possibility of the government increasing the interest rate by 0.25 to 0.50 for deposits made by senior citizens as part of social welfare scheme and it similar to doles given by banks to them when the overall interest rates are reduced. The lower interest rates will be applicable to only to fresh investors and prevailing customers will not be affected.
Even if the interest rates of Public Provident Fund are lowered to eight percent, it is still better than the average interest rates given by State Bank of India for deposits, which are at seven per cent. Moreover, the investor will have to pay income tax for fixed deposits in banks. If a lower rate of 10 per cent as income tax is taken into consideration, then the actual returns from fixed deposits made in banks is just 6.3 per cent.
A deposit in post office with tenure of one year will give an investor a returns of 8.4 per cent while the same amount while deposited in a bank will fetch only a return of 7.25 per cent. Hence, senior citizens, those looking for long term deposits for a girl child and those looking for income tax benefits will continue to invest in small scale investment schemes.