Last week, the Ministry of Finance notified a reduction in the interest rates offered on various small savings schemes such as the Public Provident Fund, National Savings Certificates, Kisan Vikas Patra, etc. The reduction by 10 basis points (0.10%) comes a few weeks after the Reserve Bank of India announced a third consecutive repo rate cut by 25 basis point. With a falling repo rate, deposit and loan interest rates will also soften. Therefore, the returns from various fixed returns investment schemes will also dip. This is, however, no reason for panic or alarm. Here’s why.

Real Returns Higher

A drop in small savings rates is no calamity. The rate cut needs to be seen in the broader context of low inflation and low interest rates. Inflation has remained benign over the last few years. Therefore, the investor’s real rate of return is higher in comparison to periods when the absolute returns were higher, but lower than the inflation rate. For example, if your PPF account offers 9% at a time the inflation rate is 10%, then your real rate of return is negative 1%. However, when your PPF offers you 7.9% while the inflation rate hovers around 4%, your real rate of return is 3.9%. This is a much better position to be in.

Good For Long Term

Small savings schemes such as PPF, Sukanya Samriddhi Scheme and Senior Citizens Savings Scheme remain among the best investment options in their niches. PPF is one of the best ways to conservatively invest for the long term. With its 15-year tenure and compounded growth, you’re provided assured and completely tax-exempted returns. So, the 7.9% you earn on PPF today is tax-exempt at every stage of investment, which means you get full value for your returns. Hence, this is a better way to invest for the future compared to, let’s say, a fixed deposit which may offer you 8% returns but actually provides just 5.6% returns after tax if you’re in the 30% tax slab. Sukanya Samriddhi, too, is triple-exempt, and an excellent way for families to invest for their girl children.

Assured Returns

These schemes are backed by the government and their returns are assured. For anyone looking to invest in a risk-free manner, small savings are the way forward. Therefore, the fall in interest rates shouldn’t dampen your investment plans. You should continue to invest as per your requirement. This is especially useful for senior citizens, who rely on fixed income instruments to meet their money needs in a risk-free manner. The SCSS currently offers 8.60% per annum, which is comfortably above the five-year FD rates offered by most banks in the 6% to 7.5% range.

Tax Benefits

PPF, SSS, NSC and SCSS allow you to avail tax deductions up to Rs. 1.5 lakh a year under Section 80C of the Income Tax Act. Therefore, by investing in these schemes you’re not only creating wealth at a conservative rate, but also saving taxes.

What You May Want To Skip

One small saving scheme you can skip is the Kisan Vikas Patra which offers you no tax rebate under 80C. It also offers a rate of return of 7.60% which doubles your deposit in 113 months. Not only is the rate of return lower than the other schemes such as PPF and NSC, your lock-in is also significantly longer. The PPF allows partial withdrawals from the sixth year while the NSC matures in five years. Therefore, you may be better off sticking to PPF and NSC, or the SSS if you’re investing for your daughter.

(The writer is CEO, BankBazaar.com)