Small savings schemes still attractive despite fixed deposit rate hike

Traditional fixed deposit investors have something to cheer about. Even though the government kept interest rates on small savings scheme unchanged, the State Bank of India (SBI) has hiked interest rates on fixed deposit (FDs) twice in about a month. The upward revision is in longer-tenured of two years and above making bank FDs once again attractive for conservative investors.

Many of these investors had started looking at debt funds in the recent months. “But the volatility in of interest rates in the past four-five months also worried many who are not experienced with debt funds,” says a Sebi-registered investment adviser.

While the bank interest rates are on the rise, the return from small savings schemes remains slightly more attractive as compared to fixed deposits in a public-sector bank. While the one-year SBI interest rate now is at 6.40 per cent, India post offers 6.6 per cent rates for the same tenure. For two-year and three-year and five-year periods, India Post offer 10 basis and 20 basis points extra. But if you prefer long tenure tax-saving FDs, India Post is far more attractive – it offers 65 basis point more than SBI.

While banks have kept pace with the rise in government bond yields, the government has not tinkered the rates on small savings schemes including those of National Savings Certificate (NSC) and Public Provident Fund (PPF), for the April-June quarter. In the December quarter, the finance ministry revised interest rates on small savings schemes downwards in the December quarter thought 10-year bond yields had hardened in the previous quarter. Small savings rates are now linked to the government bond yields.

Investment advisors say that short-term debt funds are still attractive for those in the highest tax bracket if they have a three to five-year investment horizon. If you are investing in debt as part of asset allocation for a longer horizon than look at dynamic bond funds. For the shorter-term, post office term deposit is preferable as they are fixed and backed by the government.

If you are a senior citizen, small saving scheme and FD may still remain attractive for you this financial year onwards. Those above 60 years can avail a deduction of Rs 50,000 for interest income. To enable this, the government introduced a new Section (80TTB) in the Income-tax Act—relating to deduction of interest on deposits by senior citizens. It covers interest income from deposits with banks, co-operative banks and post office.

Debt funds are also attractive for investors in the 20 per cent tax bracket provided they can stomach the volatility. If not, they can stick to FDs. Experts say that yields on government securities may continue to be volatile in the short term. Those in the lowest tax bracket should stick to small savings schemes as the difference in post-tax returns will not be much whether they opt for a debt fund or FD. But the latter offer stability of rates.

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