Update (June 30, 2020): The interest rates for the small savings schemes including PPF, SSY and SCSS have been left unchanged i.e. the interest rates for the July 1-August 31, 2020 quarter shall be the same as for the April 1-June 30 quarter.
Update March 31, 2020: Interest rates for PPF, Sukanya Samriddhi (SSY), Senior Citizens Savings Scheme (SCSS) have been cut sharply in March 2020. The Ministry of Finance has revised the interest downwards for all the small savings schemes.
This rate change will come as a negative surprise for those investors who rely on these investments for regular income. A rate cut reduces income for such savers.
Many investors look towards Small Savings Schemes not just as tax-saving options but also as reliable means of investment. However, you do not always earn a constant rate of return on these investments. The interest rate keeps fluctuating. Interest rates for the small savings schemes get revised every quarter i.e. the Ministry of Finance notifies these rates every quarter of the financial year.
Latest PPF Interest Rate, Sukanya Samriddhi Yojana Interest Rate and Interest Rate for other Small Savings Scheme
What the rate cut means and does not mean?
- The interest rates for the small savings schemes are notified by the Ministry of Finance every quarter.
- Except for PPF and SSY, the revision in interest rates does not affect old investments.
- For instance, if you have opened a Senior Citizens Savings Scheme deposit when the SCSS interest rate was 8.6% p.a., your investment will earn 8.6% p.a. for the entire duration of 5 years. Change in the interest rate after opening the deposit does not affect your rate of interest.
- However, any fresh investment in SCSS will earn the interest rate as notified for the quarter.
- To put it another way, existing SCSS and Time Deposits will continue to earn the same rate of interest as contracted at the time of opening such deposits. There will be an impact only if and when your deposits are due for renewal or have to be rolled over.
- For PPF and SSY, the notified interest rate is what you will earn on your entire PPF (or SSY) balance during the current quarter. Therefore, the impact is immediate.
While this interest rate cut on the small savings is painful, especially for retirees and senior citizens, such rate cut was expected and perhaps also the need of the hour. The small savings interest rates have been kept artificially high for quite some time. Inflation is relatively benign. The 10-year bond yield is hovering around 6-6.5% p.a. This means the Government can borrow at such low rates. In contrast, borrowing through small savings schemes was quite expensive, but this is a lesser problem directly.
A bigger problem is that these small savings schemes are competition to bank fixed deposits. Thus, the banks also have to keep FD rates and thus lending rates high. After the repo cut, a few banks have already cut their FD rates. Expect more to follow suit after this sharp cut.
With this, you might be able to borrow at lower rates (I hope so). Very bad news for savers though. A double whammy since you can expect FD rates to fall too.
Here is the Finance Ministry Notification.