After a long pause from the Covid outbreak until the July-September 2022 quarter, interest rates on small savings schemes have been on an upward march in the last four quarters. In this period, their returns have been playing catch up with the rise in yield on government securities (g-secs), to which the rates are broadly pegged. For reference, the 10-year g-sec yields rose to a peak of 7.6 per cent in June 2022 from well below 6 per cent levels in the aftermath of Covid. From mid-2022 to early 2023, the five-year g-sec yields, too, touched a peak of about 7.4 per cent, at least thrice.
While the bulk of rate revision for these post office schemes happened in the last quarter (April-June 2023), some small tweaks have been made for the July-September 2023 quarter too - on the one-three year time deposits as well as the five year recurring deposit.
G-sec yields have come off their highs with the 10-year and five-year yields now hovering around the 7 per cent mark and consensus is that the RBI rate hike cycle may be at or close to the peak. Incidentally, public, private and small finance banks have already begun trimming deposit rates across one-five year tenures – Punjab National Bank, Union Bank, Axis Bank and AU Small Finance Bank being examples. These factors imply that the current rates on small savings schemes may be the best on offer for some time to come. A combination of good returns and zero risk is hard to beat. Tax-free interest on some of the instruments is an additional attraction. Hence, investors must make the best of small savings schemes. Here are the must-haves in your portfolio:
For senior citizens
In your twilight years, where you seek to earn regular income from your savings, two things matter the most — safety and inflation beating returns. The post office Senior Citizens Savings Scheme (SCSS) ticks both the boxes. SCSS returns were drastically cut from 8.6 per cent pre-Covid to 7.4 per cent from April 2020. It moved back to the 8 per cent levels earlier this year and offers 8.2 per cent now. Hence, those who invest in SCSS during this quarter will lock into the 8.2 per cent for five years, which is the tenure of this instrument. Interest will be credited quarterly. In the last five fiscals (FY19-FY23), annual CPI inflation has ranged from 2.86 per cent to 6.9 per cent. Even assuming a high inflation at 6-7 per cent for the next five years, the returns beat inflation. While SCSS interest is taxable at slab rates, post-tax returns especially for the lower slabs are higher than the assumed inflation. A lower inflation will lead to higher real returns even for investors in the upper tax slabs.
The PM Vaya Vandhana Yojana, another risk-free option available until last fiscal, is no longer existent. So, the only comparable is immediate annuity plans of insurers which help you lock into a fixed rate for a lifetime of pension. Yields here have been on the rise too and currently go over 8 per cent in some cases. This was highlighted in our bl.portfolio Big Story last week.
Hence, while you can invest a portion of your retirement benefits/savings in immediate annuities, recent retirees, or those about to retire in this quarter, should prioritise the SCSS before considering other five-year options available with banks or NBFCs. Note that you can now invest up to ₹30 lakh in SCSS.
For tax savers
Two tax regimes are available now and though the new regime with no 80C deduction benefits will be the ‘default’ one from this year, individuals can move between the old and the new each year. So, if you are choosing to be under the old regime this year and are looking for one-time tax-saving options, the five-year NSC fits the bill. Return on the NSC moved up sharply by 70 basis points in April-June 2023 to 7.7 per cent and continues to be at this level for the current quarter. As in the SCSS, investors from July 1 to September 30 will lock into the 7.7 per cent rate for five years. Compared to this, five-year post office deposits, which qualify for 80C benefits, give only 7.5 per cent (unchanged from the previous quarter). Data from Bank Bazaar shows that the five-year tax saving FDs today, across key public and private sector banks (barring DCB Bank), offer less than 7.7 per cent. Even as some small finance banks do offer higher rates, their risk profile is not the same as the NSC, which enjoys sovereign guarantee. As explained in our earlier bl.portfolio story in early May 2023, for tax-planning purposes, NSC can take priority even over ELSS, ULIPs or other insurance-cum-investment plans.
For the young guns
Since Covid, app-based investing has caught on in a big way and this convenience has been luring young investors towards many fancy investments without fully understanding the risks involved. One less fancy but highly rewarding instrument which must top the investment bucket of young investors is PPF. Yes, despite rates on other post office schemes going up, PPF rates have been stagnating at 7.1 per cent in the last three fiscals and is unchanged so far for FY24 too. And, one does not lock into the rates here unlike the SCSS or the NSC ; every quarter, your PPF corpus will earn the declared interest rate. But one must not forget the fact this instrument offers tax-free interest, a rare commodity. As outlined in an earlier Big Story in bl.portfolio, PPF returns have beaten CPI inflation in nine of the last 10 years.Over the investment tenure of 15 years, which can be extended any number of times in blocks of five years, interest compounding works its magic too. For these reasons, PPF is a must have in the debt portfolio of young investors who can build a substantial corpus for long-term goals through this route. Up to ₹1.5 lakh can be invested here every fiscal and this must be maxed out. Given the other benefits, the presence or absence of 80C benefit does not matter here.
Similarly, young investors just starting a family and blessed with a girl child can make use of the Sukanya Samriddhi Yojana to save for her future. Although returns have moved up to 8 per cent here in the last two quarters from staying at 7.6 per cent for two years, one does not lock into the rates here. But risk-free returns and tax-free interest make you tension-free when saving for a child’s higher education. Deposits can be made for a maximum of 15 years and withdrawal is allowed after the child turns 18 or passes Class 10.
All scheme-related details can be found here.