An abrupt sharp interest rate cut announced for the new quarter beginning April on post office small savings scheme and then an overnight withdrawal has left many to wonder as to how long the rates that are currently on the higher side given the low interest rate regime may prevail. And now in context of it we tell you should you lock in the current high rates being offered on the various the small savings scheme.
Rate cut on small savings scheme may be reconsidered in the next quarter or may be sometime later
There have been news reports suggesting that the recent reversal in rate cut is more of a political issue and some 1/4th of the deposits are garnered from states currently going through election. Regardless of this, personal finance experts also opine that there exists a mechanism to align small savings scheme interest rate with the market rate. And primarily interest rate on small savings scheme is decided based on the yield on government securities (G-securities) of the same maturity over the previous year plus a 25 basis point spread is provided over and above it. 1 basis point is one-hundredth of a percentage point.
And as the overall interest rate in the economy is on the lower side, the government shall be forced to bring down the rate on small savings scheme too sooner or later.
Should you invest in small savings scheme considering possible future rate cut?
Any investments that you wish to make now into small savings scheme shall be based on broader aspects being
1. Long term financial goals
2. Your overall asset allocation in debt and equity so as to have a balanced portfolio that is not too risky and at the same time enables you to make up for the inflation demon. Other debt instruments may also be considered for any gap such as EPF etc.
3. Taxation aspect
5. Eligibility criteria such as Sukanya Samriddhi or Senior Citizens Savings Scheme for that matter
6. Maximum annual investment limit in an instrument
Now here we discuss about the individual schemes:
1. Senior Citizens Savings Scheme (SCSS):
Specifically designed for senior citizens, currently the scheme offers an attractive return of 7.4 percent which can be locked for 5 years. Also, for the investment or contribution made towards the scheme, senior citizens get 80C rebate. Besides the interest is payable quarterly so it is a good investment avenue for those seeking regular income source. Investment wise the maximum cap is Rs. 15 lakh and a couple can put in a maximum Rs. 30 lakh. Note the interest income is taxable.
This instrument that is primarily to cater to the financial needs of a girl child at the time of education or for marriage earns 7.6 percent which is tax free. Here too there is an investment cap similar to PPF of Rs. 1.5 lakh per year and it is allowed for a maximum of 2 girls of a couple.
Here this instrument is also for a long term with restrictions on withdrawal such as first withdrawal is allowed only when the child has done her tenth grade or turned 18 years of age. And the final redemption can be made upon completion of 21 years from the account opening date. Nonentheless, the leeway is granted in case of marriage i.e. if being married at an earlier date, the amount from the instrument can be withdrawn pre-maturely.
Likewise PPF now gains all the more attractiveness amid new rules being floated for EPF. Nonetheless even in a case if the rates on PPF are revised lower, it remains a good investment owing to its EEE taxation benefit.
So, considering your overall allocation into debt and if it still needs to be filled you can lock in at the current higher rates and invest in small savings scheme. But be mindful of the fact, that you definitely need to have a higher equity portfolio in the long run to beat inflation.