HYDERABAD: Falling interest rates are the order of the day as the Reserve Bank of India (RBI) appears to be on a rate-easing cycle in order to spur economic growth and increase credit offtake.
Rates are being reduced for both loans and deposits, though the good news for depositors is that the quantum of reduction is much lower than anticipated. For instance, just last week, SBI lowered interest rates on term deposits with tenors of two-three years by 0.05%, 3-5 years by 0.1% and 5-10 years by 0.15%.
This was in response to RBI’s repo rate cut of 0.25% in April. Though for now, banks are judicious in tinkering with deposit rates, such a prospect may not continue for long.
But don’t lose heart. Small savings schemes - the risk-free, government-backed schemes - are currently offering better rates than bank deposits of about 8 per cent, unlike banks that are paying a little over 6 per cent interest.
If you are a conservative investor looking for long-term savings products, financial advisors say the timing is just right to lock-in funds in small saving schemes, some of which even offer tax benefits.
For instance, of the nine post office savings schemes, at least three including Kisan Vikas Patra, National Savings Certificate and National Pension Scheme are tax-saving schemes and depositors are eligible for a deduction in taxable individual income up to Rs 1.5 lakh per annum under Section 80C. In fact, the pension scheme is eligible for an additional tax benefit of up to Rs 50,000 a year.
Unlike banks, interest rates on savings schemes are reset once every quarter, allowing depositors ample time to move and lock-in funds when rates are steeper than bank deposits. With tax breaks and lower inflation, effective returns turn out to be much higher.
But do remember that not all small savings schemes come with fixed rates.
Products like public provident fund follow a variable interest rate regime, where rates applicable on the investment change throughout the tenure. So, every time a new rate is announced, it applies only to the accumulated corpus until then.
Meanwhile, some of the bank deposits with a lock-in period of 5-10 years - strangely interest rates are lower than 3-5 year tenors - offer tax breaks under Section 80C.
Interestingly, private banks have attractive interest rates than state-run banks across all tenors. For instance, for a deposit with 3-5 year tenor, SBI and PNB offer 6.7 and 6.25 per cent respectively, while their private peers HDFC Bank and ICICI offer 7.25 per cent.