Senior citizens alert! Interest rates go up on small savings schemes

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

cheer for senior citizens

The interest rate on SCSS has been increased by 40 bps to 8%. Experts say that this is a good opportunity for senior citizens. Kalpesh Ashar, SEBI Registered Investment Advisor (RIA) and Founder, Full Circle Financial Planners & Advisors, said, “I believe senior citizens can easily invest at least 50 per cent of their corpus at the current rate as part of retirement planning. Can dedicate to SCSS. ,

The 8% interest rate on SCSS is 25-50 bps higher than the highest Fixed Deposit (FD) rates offered by leading banks to senior citizens. (see table), Ashar said, “Senior citizens should not fall prey to the high rates offered by small cooperative banks and corporate FDs and stick to leading private and PSU banks only.”

SCSS rates were also hiked in the September 2022 quarter, but experts say further hike is unlikely. “Inflation is under control, so I don’t expect SCSS or FD rates to go higher in the next quarter,” said Nitesh Buddhadev, founder, Nimit Consultancy. Provides up to tax saving investment and SCSS 1.5 lakh deduction on the principal amount at the time of investment,” he said.

Usher said that a senior couple could put up 30 lakhs in SCSS. “If a senior citizen couple is able to invest 15 lakh each, provided the corpus is available for five years at 8% interest rate, this can be one of the important components of retirement planning.”

Note that SCSS interest is taxed at Income Tax (IT) slab rates, as is the case with FDs. This can significantly reduce final returns for those in higher tax brackets. As a general rule, financial planners recommend people who are in the 30% tax bracket (income earners above) 10 lakh) against investments in products taxed at the IT slab level. Senior citizens get discount up to 50,000 on small savings schemes and interest income earned from banks and post office deposits.

SCSS comes with a lock-in of 5 years and interest is paid quarterly.

Post Office Deposit: Yes or No

The biggest gainers are in the 1-, 2- and 3-year buckets with post office deposit rate hiked by 110 bps each. 5-year deposit interest increased marginally by 30 bps. At current rates of 6.6%-7%, fixed deposits are 20-40 bps lower and, in some cases, at par with bank FDs of similar maturity buckets.

Should you opt for Fixed Deposit or Bank FD?

In terms of safety, they score higher because post office deposits are backed by the government, while bank deposits are insured only up to 5 lakhs. Banks offer better flexibility with FD tenure. There is not much difference between the two as far as returns and taxation are concerned. “Post office deposits are neglected because of their sheer structure. Bank FDs provide ease of investing in and accessing FDs online, while physical visits to post offices are still required,” said Ashar.

The rate of NSC has increased by only 20 bps, but it is an attractive option considering the tax benefits it offers. Provides tax deduction of up to 1.5 lakh on the principal and the interest can be claimed as a deduction from the second year onwards as it gets reinvested. Interest received in the fifth year is taxable at IT slab rates. On the lines of NSC, the rate on RBI floating bonds has also been increased to 7.35%.

small savings vs debt funds

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

Vijay Mantri, chief mentor and co-promoter, JRL Money, said compounding also gives debt funds an edge. “SCSS has 8% simple interest, whereas MF has the benefit of compounding. Debt funds giving 7.3% annualized returns invested for 10 years will fetch 10% compound interest,” he said.