Small savings schemes (SSS) such as Public Provident Fund (PPF) or National Savings Certificate (NSC) have been popular with investors, not only because they are safer than other options, but also because they receive favourable tax treatment. Another attractive factor is the relatively stable interest rate offered by these schemes. Thus small savings schemes form a major chunk of investment portfolios for many Indians. But these Small Savings Schemes (SSS) may lose their charm soon.

The Reserve Bank of India (RBI) has been insisting that banks pass on the full benefit of policy rate cuts to borrowers. In the fourth bi-monthly monetary policy statement for 2015-16, the RBI has stated, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points (bps) cut in the policy rate are removed.

Many nationalise and private banks have swung into action and reduced the base rates after the RBI's policy statement. Effectively, even the interest rates offered on fixed deposits have been reduced. But the fact is transmission hasn't been proportionate to the reduction in policy rates. Commenting on a recent 50bps rate cut accorded by RBI, the Finance Minister said, “We look forward to the transmission of these cuts to the rest of the economy and we'll work to facilitate this transmission, including by reviewing the framework of small savings."

Taking serious note of this move, the interest rate offered on small savings schemes may scale down.

Why aren't small savings schemes being spared?
The table below will give you an idea of how attractive small savings schemes are at the moment. Besides offering the benefits of compounding, these benefits push the actual returns earned from these schemes much higher than those offered by banks on fixed deposits. Banks directly compete with small savings schemes for deposits. Therefore, how much PPF or NSC offer becomes equally relevant in the process of making the monetary policy transmission more effective and efficient.
 

Scheme Name	Rate of Interest p.a.	Tax benefit
Post Office Monthly Income Scheme (POMIS)	8.40%	Nil
KisanVikas Patra (KVP)	8.70%	Nil
Public Provident Fund (PPF)	8.70%	Deduction u/s. 80C
5-Year NSC VIII Issue	8.50%	Deduction u/s. 80C
10-Year NSC IX Issue	8.80%	Deduction u/s. 80C
Post Office Time Deposits (POTD)	8.40% - 8.50%	Deduction u/s. 80C
5-Year Recurring Deposit	8.40%	Nil
Savings Deposits	4.00%	Nil
SukanyaSamriddhiYojana (SSY)	9.20%	Deduction u/s. 80C
Senior Citizens Savings Scheme (SCSS)	9.30%	Deduction u/s. 80C

(Source: India Post, PersonalFN Research)  

Where are interest rates on SSS headed?
While the Central Bank may want to support growth by being accommodative and allowing cheaper credit, the interest rates on small savings schemes may go down.

So, should you be worried?
If you are a senior citizen solely dependent on income from the interest earned on small savings schemes, these schemes may begin to look unappealing given the unpredictability of interest rates. Having said this, proper planning might still help. If your risk profile does not permit you to invest in risky assets, as an investment avenue under debt small savings schemes may still be a decent option given the tax advantages offered; especially for retail investors and senior citizens.

On the other hand, if you are in the early stages of the economic lifecycle, your risk profile may encourage you to invest in risky asset classes, in which case you may avoid investing in SSS.

Small savings schemes have been playing an important role in the tax and holistic financial planning. As a result, any change in their way of functioning may affect your planning as well. So when you invest, keep in mind your age, financial goals, risk appetite, investment time horizon, nearness to financial goals, liquidity needs, the actual rate of returns you will earn, as well as tax implications among a host of other facets.

Economic Affairs Secretary, Mr Shaktikanta Das assured investors that their interests will also be considered while changing the framework for small savings schemes. It remains to be seen what the Government actually does to safeguard the small savers and senior citizens in particular.

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mmukherjee202@gmail.com Oct 06, 2015 Mistake ,mistake ! If the Govt indulges in cutting SSS interest rates ,it would put peoples wrath from frying pan to fire. What about the good old samaritans who have no pension ,no other fixed income but interest from SSS ? They are also tax payers ,no matter how small the amount is and serve the nation to their mite. Govt. must consider their case ,otherwise ,let next election come ,they will show the present Govt. door.

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