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Investors in small savings schemes have a reason to rejoice, especially if they are senior citizens. Interest rates on five small savings schemes—Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Monthly Income Savings Scheme, Kisan Vikas Patra (KVP) and post office time deposits—have been hiked by 20-110 basis points (bps) for the January-March quarter (see table). One basis point is one-hundredth of a percentage point.

Interest rates on the Public Provident Fund (PPF) and Sukanya Samriddhi Scheme (SSY) remained unchanged, at 7.1% and 7.6%, respectively. A hike in the rate for PPF could be overdue as the 10-year G-sec yield is hovering at 7.3%. As per the formula used to derive savings scheme rates, the PPF rate should be 25 bps higher than the average quarterly yield of 10-year G-sec. Rates of schemes with shorter maturity (5 years or less) tail the repo rate.

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Graphic: Mint

Cheer for senior citizens

The interest rate on SCSS has been hiked by 40 bps to 8%. Experts say it’s a good opportunity for senior citizens . “I believe senior citizens can easily dedicate at least 50% of their corpus to SCSS at the current rate as part of retirement planning," said Kalpesh Ashar, founder of Full Circle Financial Planners and Advisors and a Sebi-Registered Investment Adviser (RIA).

The 8% interest rate on SCSS is higher by 25-50 bps than the highest fixed deposit (FD) rates offered by major banks to senior citizens (see table). “Senior citizens should not fall for the bait of high rates offered by small co-operative banks and corporate FDs and just stick to major private and PSU banks," said Ashar.

SCSS rates were hiked in the September 2022 quarter as well, but a further hike looks unlikely, say experts. “Inflation is in control so I don’t expect SCSS or FD rates to go higher in the next quarter," said Nitesh Buddhadev, founder, Nimit Consultancy. “This (January-March) is also the time when most people rush to make tax saving investments and SCSS offers up to 1.5 lakh deduction on principal at the time of investment," he added.

Ashar said a senior couple can put in up to 30 lakh in SCSS. “If a senior citizen couple is able to invest 15 lakh each, provided the corpus is available, at 8% interest rate for five years, it can be one of the crucial components of retirement planning."

Take note that interest from SCSS is taxed at income tax (I-T) slab rates, as is the case with FDs. This can significantly prune down the final returns for those in higher tax brackets. As a general rule, financial planners advise those in the 30% tax bracket (having income above 10 lakh) against investing in products that are taxed at the I-T slab level. Senior citizens get a deduction up to 50,000 on interest income earned from small savings schemes and banks and post office deposits.

SCSS comes with a 5-year lock-in and the interest is paid quarterly.

Post office deposits: yay or nay

Post office deposits across 1-, 2- and 3-year buckets are the biggest gainers with a 110 bps hike in rate. The 5-year deposit interest rose by a nominal 30 bps. At current rates of 6.6%-7%, time deposits are 20-40 bps lower and in some cases, at par with bank FDs of similar maturity buckets.

Should you opt for term deposits or bank FDs?

In terms of safety, they score higher as post office deposits are government backed, while bank deposits are insured only up to 5 lakh. Bank FDs offer better flexibility with tenures. As for returns and taxation, there is not much difference between the two. “Post office deposits are neglected because of their sheer structure. Bank FDs offer ease of investing in and accessing FDs online, whereas post offices still require a physical visit," said Ashar.

NSC rate has increased by only 20 bps, but given the tax benefits it offers, it is an attractive option. It offers tax deduction of up to 1.5 lakh on the principal and interest from second year onwards can be claimed as deduction as it gets reinvested. Interest received in the fifth year is taxable at I-T slab rates. In line with NSC, the rate on RBI floating bonds have also gone up to 7.35%.

Small savings vs debt funds

Experts say it is not fair to compare the two. But from a performance perspective, debt mutual funds offer better tax efficient returns. Debt funds held for over three years get indexation benefit, which means that the purchase price is increased to adjust for inflation during the holding period. This reduces the otherwise long-term capital gains (LTCG) tax of 20% on debt funds significantly and even makes it zero for the periods of high inflation, as is the case in the last one year.

Vijai Mantri, chief mentor and co-promoter, JRL Money, said compounding also gives debt funds an edge. “SCSS’s 8% is simple interest, whereas MFs gain from compounding. A debt fund giving 7.3% annual return invested for 10 years will yield 10% compounded interest," he said.

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Updated: 06 Jan 2023, 09:08 AM IST
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