Savers Get the Axe: Govt Cuts Rates on PPF, Senior Citizen Schemes

The cut in PPF interest rates could mean that middle-class savers take a hit.

In a move that will hit common man, the government today slashed interest rates on all small savings schemes, including PPF, Kisan Vikas Patra (KVP) and senior citizen deposits, to make them more market aligned.

• Interest rate on Public Provident Fund (PPF) scheme has been cut to 8.1 percent for the period 1 April to 30 June, from 8.7 percent, at present.
  
• Interest rate on KVP will be reduced to 7.8 percent from 8.7 percent.
  
• Senior citizen savings scheme of five years would earn 8.6 percent interest compared with 9.3 percent.
  
• Girl-child saving scheme, Sukanya Samriddhi Account will see interest rate of 8.6 percent as against 9.2 percent.
  

The PPF is a popular savings scheme among the middle-class and the 60 basis points cut in the interest rates on this scheme could mean substantial dent in savings. The government has said that the rates will be reviewed every three months, but if they remain unchanged in the next financial year, anyone with Rs 5 lakh in your PPF account would face a hit of Rs 3,000 in 2016-17, reports The Times of India.

The reduction in rates on small savings schemes is also bad news for those who have large sums parked in bank fixed deposits, as banks could now mirror the government’s move with cuts in deposit rates.

This, in turn, will pave the way for lower lending rates and translate into lower EMIs in the coming months, should the banks decide to pass on the benefit.

However, given that a two-three year fixed deposit (FD) with SBI fetches the highest rate of 7.5 percent a year, savings in PPF still remain more attractive, especially with tax benefits thrown in.

The Times of India report

Terming the decision slashing of interest rates as a “normal exercise of resetting” rates in March every year, Economic Affairs Secretary Shaktikanta Das said, “this will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates.”

However, unlike previous years when interest rates were set for the full year, the government will from now on set interest rates every quarter based on previous three-month yields on Government-Securities or G-Sec.

• While the interest rate on Post Office savings has been retained at 4 percent, the same for term deposits of one to five years has been cut.
  
• Five-Year National Savings Certificates will earn an interest rate of 8.1 percent from April 1 as against 8.5 percent, at present.
  
• Five-year Monthly Income Account will fetch 7.8 percent as opposed to 8.4 percent now.
  

“This is being done to make small saving interest rates more market linked and more market aligned,” Das told reporters. Asked when banks will cut rates, he said, “Banks will have to decide on their own. The government has given signals to them. It is for the banks to take a decision and move forward.”