The government on Tuesday(31/03/2020) announced a sharp cut in interest rates offered of small savings schemes for the April June quarter. Although the fall in the interest rate of these investment schemes was in-line will the fall in market rates, the government had earlier ignored this policy to give relief to small savers and senior citizens who depend on interest income.
With the recent fall in interest rate, the popular Public Provident Fund (PPF) will fetch a rate of 7.1%, down 80 basis points from an earlier rate of 7.9%. Similarly, the Senior Citizens Savings Scheme will see the annual interest rate drop by 1.2% to 7.4% as compared to 8.6% earlier.
One- to three-year post office time deposits will now fetch 5.5% instead of 6.9% earlier. The rate on five-year term deposits has been pared by a percentage point to 6.7%. For a five-year recurring deposit, the interest rate has been reduced from 7.2% to 5.8%. The interest rate on National Savings Certificate (NSC) has fallen to 6.8% from 7.9% earlier and on Kisan Kisan Vikas Patra rate has been reduced from 7.6% to 6.9%. The KVP will mature in 124 months instead of 113 months earlier.
Experts say the interest rate on small savings schemes is likely to stay lower for a considerable period of time till the economy shows signs of recovery. Fall in an interest rate of these schemes will impact the maturity amount of long term savings schemes such as PPF and Sukanya Samridhhi Yojana (SSY) by up to 10%.
How PPF returns will be impacted post rate cut
The 80 basis points fall in PPF interest rate will reduce your maturity value by nearly Rs 2.70 lakh after 15 years. Assuming that the current rate of 7.1% remains constant for the next 15 years, your Rs 1.5 lakh investment in the fund every year (in annual mode) will grow to Rs 39.45 lakh as compared to Rs 42.14 lakh if the interest rate had been 7.9%.
In the above example, if you increase your PPF account maturity by a block of 5-years without a contribution then your maturity amount will increase to Rs 55,58,406 (at 7.1% interest) as compared to Rs 61,63,413 (at 7.9% interest) earlier.
How SSY returns will be impacted post rate cut
Your SSY account will now fetch a rate of 7.6% as compared to 8.4%. The fall in the SSY interest rate will reduce your SSY maturity amount by up to Rs 7.75 lakh in 21 years assuming that you invest Rs 1.5 lakh in this scheme every year. Assuming the rate of 7.6% will remain constant over the next 21 years, your SSY maturity value will be Rs 75,13,825 as compared to Rs 82,89,696, which you would have got at an interest rate of 8.4%.
