Interest Rates on Post Office Small Saving Schemes – FY 2013-14

by Shiv Kukreja on April 3, 2013

in Fixed Deposits

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Interest rates on most of the Post Office small saving schemes have been reduced by 10 basis points (bps) or 0.10% effective April 1, 2013. The change has become an annual exercise now and it gets announced in March every year. Here is the link to the statement issued by the finance ministry on Monday, March 25th.

Except 1-year time deposit, all other saving schemes will now carry 0.10% lower rate of interest. Your Public Provident Fund (PPF) account will now earn you 8.70% per annum tax-free rate of interest as against 8.80% earlier. 5-year and 10-year National Savings Certificates (NSC) will now carry interest rates of 8.50% and 8.80% per annum respectively, as against 8.60% and 8.90% now.

Post Office Monthly Income Scheme (POMIS) will also earn you lower at 8.40% vs. 8.50% earlier. The interest rate on Senior Citizens Savings Scheme (SCSS) also stands reduced to 9.20% as against 9.30%.

Here is the table having the interest rates applicable for FY 2012-13 and FY 2011-12:


Interest rate differential between PPF and Tax-Free Bonds

Tax-free bonds as a fixed income investment have become reasonably popular among investors now and since the interest income earned on both tax-free bonds and PPF is tax-free, most financial advisors/analysts compare these two instruments before recommending it to their clients.

Till financial year 2011-12, PPF was fetching 8.60% per annum which got increased to 8.80% per annum effective April 1, 2012 and at the same time, tax-free bonds were getting issued at 8.30% per annum. So, the interest rate differential was only 0.30% which made tax-free bonds a very attractive investment avenue for high net worth individuals (HNIs).

Now, the interest rates on tax-free bonds have fallen to approximately 7.50% per annum as compared to PPF which will now yield 8.70% effective April 1, 2013. This has increased the interest rate differential to 1.20% and hence makes PPF the best fixed income investment for most of the individual investors.

Honestly speaking, I was expecting the interest rate on PPF to fall below 8.50%. As an investor, it is a pleasant surprise to still get 8.70% on PPF but as an Indian and as an equity investor in Indian stock markets, I am disappointed as I think the interest rates have been set on a higher side and it is going to put one more strain on the finances of Indian government. It makes me think again if the government is still serious about containing its fiscal deficit or it wants to keep everybody silent one year before the elections, ignoring its already bad financial condition.

{ 5 comments… read them below or add one }

Ramamurthy April 3, 2013 at 8:48 am

Considering the fact that the consumer price index is hovering around 10.5% and is not likely to fall the inflation adjusted return which was already negative is in furthur minus.These schemes are all hugely popular in India and the equity culture has to catch up to beat inflation..I hope this will happen.

Reply

ARUN BATRA April 3, 2013 at 6:56 pm

1. The interest rate on PPF upto Apr-2012 was 8% (not 8.8%) for many years. It was then linked to the market conditions as per specified formula and fixed at 8.8% for 2012-13 and now 8.6% for 2013-14.

2. One should be careful while comparing PPF and tax savings bonds. They have different objectives and rules – especially liquidity during first 6 years.

Reply

Shiv Kukreja April 3, 2013 at 11:31 pm

1. Rate of interest on PPF got hiked twice, from 8% to 8.6% w.e.f. December 1, 2011 & then to 8.8% w.e.f. April 1, 2012. Now, it has been lowered to 8.7% w.e.f. April 1, 2013. So, there was a time when the interest rates were 8.6% for a short period of 4 months.

2. Tax saving bonds are no longer available. Probably you want to say Tax-Free Bonds, right? From investment perspective, PPF and tax-free bonds are comparable to the closest, if not completely. Liquidity is an issue with PPF.

Reply

chamarthisailaja April 25, 2013 at 5:49 pm

i have invested in HDFC crest 2yrs back with 50000 premium every yr. But the growth is very slow. please suggest what to do.
what is the interest rate of SBI ppf account. they give us only7.75 P.a

Reply

Shiv Kukreja April 25, 2013 at 7:27 pm

Hi Chamarthisailaja… An investor should never mix his/her life cover needs with the investments he/she makes. Life insurance policies are poor products for investment purposes as they carry high expenses and very low transparency is there. Please consult an unbiased financial advisor to know what to do with your HDFC Crest policy.

PPF interest rate is same across all post offices and all banks. It is 8.70% per annum this financial year.

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