Getty ImagesThe year 2020 has been especially abysmal for fixed income investors. Looks like it will be the same in 2021 as well. That is because the government has announced a cut in interest rates of small savings schemes. That is right, the government has cut interest rates on small savings schemes after keeping them unchanged for the past three quarters. As per a finance ministry circular, dated March 31, 2021, interest rates on small savings schemes have been cut by massively between 50 -110 basis points (100 basis points/bps = 1%) for the first quarter of the financial year 2021-22. The PPF interest rate below 7% would be the first time since 1974, a 46 year low.
With effect from April 1, 2021, post office saving schemes will fetch interest rates as follows: Public Provident Fund (PPF) - 6.4 per cent down from 7.1 per cent earlier, National Savings Certificate (NSC) - 5.9 per cent, down from 6.8 per cent earlier, Sukanya Samriddhi Yojana (SSY) - 6.9 per cent, down from 7.6 per cent earlier. Post office time deposit rates across tenures have been reduced by 0.40 to 1.1% and will earn in the range of 4.4- 5.3%.
This is the second time the government has cut interest rates on small savings schemes in the past one year. In the April-June quarter of 2020-21, the government had slashed rates of small savings schemes by 70-140 bps. (100 bps= 1 per cent).
With the latest cut, interest rates on small savings schemes have been reduced by a total of 120-250 bps during the current financial year.
Here is a look at the interest rates on various small savings schemes for the fourth quarter of FY 2020-21.
Interest rates on post office saving schemes
Source: Finance ministry circular dated March 31, 2021
The rates have been cut for the quarter because of the fall in the 10-year government securities (G-Sec) yield. The Shyamala Gopinath Committee had suggested that the interest rates of different small saving schemes should be 25-100 bps higher than the yields of the government bonds of similar maturity.
Partial relief for fixed income investors
With the RBI maintaining status quo on rates, banks too have started going slow on FD interest rate cuts. The State Bank of India (SBI) has kept its one-year FD interest rate unchanged since September 2020. Currently, the bank's one-year FD interest rate is 4.90%. Then there are some banks such as Canara Bank that have announced a hike in interest rates on FDs of longer-term tenures of two year plus.
Further, the latest cut in interest rates on post office schemes will lower the interest rate differential vis-à-vis bank fixed deposits.
With effect from April 1, 2021, post office saving schemes will fetch interest rates as follows: Public Provident Fund (PPF) - 6.4 per cent down from 7.1 per cent earlier, National Savings Certificate (NSC) - 5.9 per cent, down from 6.8 per cent earlier, Sukanya Samriddhi Yojana (SSY) - 6.9 per cent, down from 7.6 per cent earlier. Post office time deposit rates across tenures have been reduced by 0.40 to 1.1% and will earn in the range of 4.4- 5.3%.
This is the second time the government has cut interest rates on small savings schemes in the past one year. In the April-June quarter of 2020-21, the government had slashed rates of small savings schemes by 70-140 bps. (100 bps= 1 per cent).
With the latest cut, interest rates on small savings schemes have been reduced by a total of 120-250 bps during the current financial year.
Here is a look at the interest rates on various small savings schemes for the fourth quarter of FY 2020-21.
Interest rates on post office saving schemes
| Instrument |
Interest rate (%) from Jan 1, 2020 |
Interest rate (%) from April 1 to June 30, 2021 |
Change in Interest rate (%) |
| Savings deposit |
4 |
3.5 | 0.5 |
| 1 year Time Deposit |
5.5 |
4.4 | 1.1 |
| 2 year Time Deposit |
5.5 |
5.0 | 0.5 |
| 3 year Time Deposit |
5.5 |
5.1 | 0.4 |
| 5 year Time Deposit |
6.7 |
5.8 | 0.9 |
| 5-year Recurring Deposit |
5.8 |
5.3 | 0.5 |
| 5-year Senior Citizen Savings Scheme |
7.4 |
6.5 | 0.9 |
| 5-year Monthly Income Account |
6.6 |
5.7 | 0.9 |
| 5-year National Savings Certificate |
6.8 |
5.9 | 0.9 |
| Public Provident Fund |
7.1 |
6.4 | 0.7 |
| Kisan Vikas Patra |
6.9 (will mature in 124 months) |
6.2 | 0.7 |
| Sukanya Samriddhi Yojana |
7.6 |
6.9 | 0.7 |
The rates have been cut for the quarter because of the fall in the 10-year government securities (G-Sec) yield. The Shyamala Gopinath Committee had suggested that the interest rates of different small saving schemes should be 25-100 bps higher than the yields of the government bonds of similar maturity.
Partial relief for fixed income investors
With the RBI maintaining status quo on rates, banks too have started going slow on FD interest rate cuts. The State Bank of India (SBI) has kept its one-year FD interest rate unchanged since September 2020. Currently, the bank's one-year FD interest rate is 4.90%. Then there are some banks such as Canara Bank that have announced a hike in interest rates on FDs of longer-term tenures of two year plus.
Further, the latest cut in interest rates on post office schemes will lower the interest rate differential vis-à-vis bank fixed deposits.
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13 Comments on this Story
 | Mathivanan T56 seconds ago PPF is the saving of Senior citizen who would not go for any other investment like mutual funds, shares, bonds etc. The government must reconsider the revision of interest rates. |
| Ashu Bajaj1 minute ago There was a time when NSC was doubled in 5 years. PPF interest was above 12 %. What I feel is that the government doesn't want these PPF or NSC schemes to flourish any more. That is why in the income tax filing also they have taken out 2 ways to file tax one with these schemes and one without. so the only way to discontinue these schemes is to reduce the interest rates and make it more and more unattractive. Like what ever you earn in PPF deposit is yours. The Government doesn't get a thing. That the Government can't digest, How can you make money without filling their treasury |
| Alok Maurya1 minute ago Chor sarkar... pensions of all legislators must be stopped immediately |