Fresh Interest Rate Hikes in Popular Small Saving Schemes Announced

Government increases interest rate in small saving schemes

small saving schemes

The Reserve Bank of India’s repo rate stood still for two years throughout the pandemic at 4%. Not surprisingly, the interest rate on small savings didn’t see a revision either, since Q1 of 2020-21. Since May 2022, RBI has hiked the repo rate by 190 basis points, and its benefit is finally getting reflected in small saving interest rates.

On Thursday, 29 September 2022, the RBI hiked the interest rate in five small saving schemes by up to 0.3%. Notably, in all these schemes the income accrued is taxable. The interest rates for the popular NSC and PPF schemes have been left untouched for now by the apex bank.  

Snapshot of the Changes

The small saving schemes whose interest rates have been revised for the third quarter of 2022-23 are,

  • 2-year time deposit – The interest rate for the two-year deposit has been increased by 20 basis points. It now stands at 5.7%, a 0.2% hike from the previous 5.5%.
  • 3-year time deposit – The three-year deposit saw the biggest hike of 0.3% or 30 basis points. The new interest rate is 5.8%, up from the previously offered 5.5%. 
  • Senior Citizen Savings Scheme – This scheme offered a respectable interest rate of 7.4% even during a relatively stagnant period. It has been increased by 20 basis points and now commands 7.6% per annum. The Finance Ministry has clarified that in the event of the death of the senior citizen account holder, the rate of interest will be applicable till the date of the account holder’s death. The SCSS account will generate the post office savings deposit interest rate of 4% from the date of demise till the date of closure of the account.
  • Kisan Vikas Patra– KVP interest rate has been raised by 10 basis points from 6.9% to 7.0%. Besides, the maturity period of KVP has been reduced by a month. Earlier it had a tenure of 124 months, but from now it will mature in 123 months.
  • Monthly Income Account Scheme – The interest rate for this scheme has been raised by 10 basis points i.e., from 6.6% to 6.7%. This scheme has a lock-in period of five years and generates a monthly interest income.

Also Read: Why should you invest post office monthly income scheme POMIS article

No Changes in a Few Other Schemes

On the other hand, the following small saving schemes didn’t see any changes in the interest rate.

  • Savings deposit will continue at 4% per annum,
  • 1-year time deposit continues to offer 5.5%,
  • 5-year time deposit interest rate will remain at 6.7%,
  • 5-year recurring deposit continues with the existing interest rate of 5.8%,
  • Sukanya Samriddhi Account Scheme remains unchanged at 7.6% per annum,
  • The interest rate for National Savings Certificate remains at 6.8%, and,
  • The Public Provident Fund scheme will also continue at 7.1%.

Also Read: Find out the online process for India post office debit card pin generation

Small Saving Scheme Yield – Influence and Calculation

The Shyamala Gopinath Committee of 2011 recommended that small saving scheme interest rates should be linked with market yields. Based on this recommendation, the government has been reviewing the interest rates for these schemes quarterly, using the previous three month’s yield of government securities as a benchmark. The interest rate calculation is based on the yields of government securities of a comparable maturity period, with a review lag of three months. 

This rate increase is seen as a welcome step by investors as the last interest rate hike in these schemes was rolled out four years ago in the Q3 of 2018-19. The influential government securities have recently seen an increase in interest yields. So, of late fixed-income investors have been expecting hikes in small saving schemes from the government.

The Reserve Bank of India’s repo rate stood still for two years throughout the pandemic at 4%. Not surprisingly, the interest rate on small savings didn’t see a revision either, since Q1 of 2020-21. Since May 2022, RBI has hiked the repo rate by 190 basis points, and its benefit is finally getting reflected in small saving interest rates.

On Thursday, 29 September 2022, the RBI hiked the interest rate in five small saving schemes by up to 0.3%. Notably, in all these schemes the income accrued is taxable. The interest rates for the popular NSC and PPF schemes have been left untouched for now by the apex bank.  

Snapshot of the Changes

The small saving schemes whose interest rates have been revised for the third quarter of 2022-23 are,

  • 2-year time deposit – The interest rate for the two-year deposit has been increased by 20 basis points. It now stands at 5.7%, a 0.2% hike from the previous 5.5%.
  • 3-year time deposit – The three-year deposit saw the biggest hike of 0.3% or 30 basis points. The new interest rate is 5.8%, up from the previously offered 5.5%. 
  • Senior Citizen Savings Scheme – This scheme offered a respectable interest rate of 7.4% even during a relatively stagnant period. It has been increased by 20 basis points and now commands 7.6% per annum. The Finance Ministry has clarified that in the event of the death of the senior citizen account holder, the rate of interest will be applicable till the date of the account holder’s death. The SCSS account will generate the post office savings deposit interest rate of 4% from the date of demise till the date of closure of the account.
  • Kisan Vikas Patra– KVP interest rate has been raised by 10 basis points from 6.9% to 7.0%. Besides, the maturity period of KVP has been reduced by a month. Earlier it had a tenure of 124 months, but from now it will mature in 123 months.
  • Monthly Income Account Scheme – The interest rate for this scheme has been raised by 10 basis points i.e., from 6.6% to 6.7%. This scheme has a lock-in period of five years and generates a monthly interest income.

Also Read: Why should you invest post office monthly income scheme POMIS article

No Changes in a Few Other Schemes

On the other hand, the following small saving schemes didn’t see any changes in the interest rate.

  • Savings deposit will continue at 4% per annum,
  • 1-year time deposit continues to offer 5.5%,
  • 5-year time deposit interest rate will remain at 6.7%,
  • 5-year recurring deposit continues with the existing interest rate of 5.8%,
  • Sukanya Samriddhi Account Scheme remains unchanged at 7.6% per annum,
  • The interest rate for National Savings Certificate remains at 6.8%, and,
  • The Public Provident Fund scheme will also continue at 7.1%.

Also Read: Find out the online process for India post office debit card pin generation

Small Saving Scheme Yield – Influence and Calculation

The Shyamala Gopinath Committee of 2011 recommended that small saving scheme interest rates should be linked with market yields. Based on this recommendation, the government has been reviewing the interest rates for these schemes quarterly, using the previous three month’s yield of government securities as a benchmark. The interest rate calculation is based on the yields of government securities of a comparable maturity period, with a review lag of three months. 

This rate increase is seen as a welcome step by investors as the last interest rate hike in these schemes was rolled out four years ago in the Q3 of 2018-19. The influential government securities have recently seen an increase in interest yields. So, of late fixed-income investors have been expecting hikes in small saving schemes from the government.

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