All You Need To Know About The Interest Cuts In Saving Schemes in 2017

Small savings schemes are the best financial instruments that provide safe investment options and attractive returns for the public.  

Public Provident Fund (PPF), Kisan Vikas Patra (KVP), National Saving Certificate, Senior Citizens Saving Scheme, Sukanya Samriddhi Yojana are some of the schemes that facilitate your saving plans. However, the recent changes announced by the Finance Ministry may force you to rethink your investing options.

The government has slashed interest rate on all saving schemes by 0.1% for the July-September quarter which will prompt the banks to lower the deposit rates.  Read on to know more about the interest rate cut in detail.

Drop in the Interest Rates

The government has moved to a quarterly reset of small savings rate since April 2016 and linked them to the yield on government securities to improve the transmission of monetary policies by banks.

Being one of the most popular saving schemes, PPF will offer an interest rate of 7.8% as against 7.9% offered in April-June quarter. This scheme was most sought after due to its high yield as the interest rate was 8.7% till 2016. However, the interest rate will change for each quarter.

Kisan Vikas Patra (KVP) will provide an interest rate of 7.5% as against 7.6% in the first quarter and the scheme will mature in 115 months. 5-Year National Savings Certificate will give an interest of 7.8%.

Sukanya Samriddhi Yojana, which was launched in 2015 to facilitate education and marriage expenses for women, fetched an interest rate of 9.1%. Under the current changes, the scheme will yield an interest of 8.3% as against 8.4% during the first quarter of the fiscal. Similarly, 5-Year Senior Citizens savings scheme will fetch an interest rate of 8.3 % and the interest is paid quarterly.

The reason for the revision is pointed to higher liquidity over the last eight months following demonetisation. However, the government has not revised the interest rate on savings account, retaining it at 4%.

Should You Change Your Investment Plans?

Considering the current scenario, the drop of 0.1% of the interest rate on saving schemes will not much affect your returns. The benefit of these investments is that there will no tax deduction at source.

To look for other alternatives, an investor can consider debt mutual funds as the best option for saving if the timeline is for more than 3 years.

As the drop in the interest rate is not permanent, you can continue to invest in these small saving schemes. The interest rate will be revised for every quarter of the fiscal year based on the yield on Government securities. Compare the interest rate, returns and risk factor with other schemes and choose the one that is best for you.