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ppf interest rate: Interest rates of PPF, Sukanya Samriddhi Yojana, other post office schemes kept unchanged by govt

To not face the ire of fixed income investors, for the sixth quarter in a row, the government has kept the interest rates of small savings schemes unchanged. What this means is that for the quarter ending December 31, 2021, investors in small savings schemes like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) will continue to earn the same interest rate as they were earning during the quarter ending September 30, 2021. New investments made during the October-December 2021 quarter into these schemes will also earn the same interest rates as in the previous quarter.

This was announced by the finance ministry via a circular dated September 30, 2021. As per the ministry circular, PPF will continue to earn 7.1%, the NSC will fetch 6.8%, and the 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 third quarter of FY 2021-22.

Instrument Interest rate (%) for October 1, 2021 to December 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

Source: Finance ministry circular

Relief for debt investors

The government’s status quo on small savings schemes rates comes a little more than a week before the RBI’s bi-monthly monetary policy review. The apex bank is said to maintain status quo on key rates yet again, which is again reason to cheer for investors of fixed income products.

That is because with the RBI keeping rates unchanged, banks may not cut interest rates on FDs any further.

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 3-3.5% per annum.

Small savings rate cut debacle

On March 31, 2021, the government had in fact announced a rate cut for small savings schemes for the quarter ending June 30, 2021. Late evening of March 31, 2021, the finance ministry had announced that interest rates on small savings schemes have been cut sharply by between 40 -110 basis points (100 basis points/bps = 1%) for the first quarter of the financial year 2021-22. After this cut, the interest rate on PPF interest rate would have fallen below 7%, the first time since 1974, a 46 year low.

Then immediately via an early morning tweet, the government announced that the sharp cut in interest rates of small savings schemes had been rolled back.

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 higher than the yields on government bonds of similar maturity.

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