AFTER THE RESERVE Bank of India (RBI) had raised the repo rate by 50 basis points in the last two revision cycles, the government has now raised the rates for small savings schemes or postal deposits by up to 40 basis points, except for post office savings account. The new rates will be applicable from October 1 and the hike is in line with the rising interest rate trend in banks deposits and government securities. One basis point is one-hundreth of a percentage point.
Earn more from small savings
The government resets the interest rates of small savings every quarter depending on the bond yields. Schemes such as Public Provident Fund (PPF) and Sukanya Samriddhi Schemes are popular with investors because of the tax deduction of up to `1.5 lakh under Section 80C of the Income Tax Act and the returns are also tax free. In fact, if an investor is in the 30% tax bracket, the returns from PPF would be around 10.4% a year after the new rates become effective.
A resident Indian can open a PPF account and even a second account in the name of minors, but the maximum investment limit will be `1.5 lakh for all accounts taken together. The PPF account matures after 15 years and can be renewed every five years.
Returns from other schemes like National Savings Certificates, Kisan Vikas Patra and term and recurring deposits are taxable. However, investors get tax break of up to `1.5 lakh for investments in National Savings Certificates and even bank deposits for five years and above. Returns from banks deposits are, however, taxable.
Increase in small savings rates and bank deposit rates will attract risk-averse investors to park money in these instruments. However, experts suggest one should wait for a few more months to lock money for longer-term deposits as interest are likely to rise further.
Faster transmission in bank deposit rates
Banks are increasing their deposit rates in order to mop up funds as deposit growth remained at 5% in 2017-18, half of credit growth. For instance, the country’s largest lender State Bank of India is offering 6.7% interest on a one-year deposit. Post-tax, the returns will be 5.3% assuming the depositor is in the 20.6% tax bracket. The bank is offering 6.85% on deposits for five-year and above. Similarly, Kotak Mahindra Bank is offering 7.4% for maturity period of 365 days to 389 days. For five years and above, it is offering 6.5% interest rate.
A report by Care Ratings says that in the last six years, the RBI increased rates on six occasions (including August 1), all of which were of the order of 25 bps. In an increasing interest rate scenario, the banks react faster on lending rates compared with deposit rates. In the past, it was seen that that the quantum of transmission of the lending rate was more than the deposit rates.
However, in the last two rate hikes the quantum of transmission of the deposit rates is more than the lending rates. “The quicker transmission in the deposit rate can be partly attribsuted to the reversal of interest rate regime witnessed in recent months,” the report notes.
Even companies are offering higher rates for their deposits to garner savings. For instance, pressure cooker manufacturer, Hawkins Cookers Ltd is offering 10.75% on 36-month deposits and 10.25% rate a year on a 12-month deposits. The company is rated ICRA MAA (Stable)-. The minimum amount one can invest is `25,000. Deposits of top-rated firms are much in demand because of volatile equity markets.
While investors may be tempted to invest in deposits and debt products because of rising interest rates and the element of stability, one must also look at equity-related products for higher long-term returns, albeit with some risks.