Savings

The government is raising interest rates on small savings plans, should you invest in them?

The Ministry of Finance has announced that the SCSS will now offer a yield of 7.6%, 20 basis points higher than the 7.4% pa in force during the quarter. October-December 2022. This follows the recent 50 basis point (bps) hike in the repo rate by the Reserve Bank of India (RBI) on September 30, 2022.

The interest rate on Kisan Vikas Patra was also increased by 10 basis points to 7% from 6.9% previously, while the maturity months decreased by one month (previously it was 124 months, which has now been reduced to 123 months). ). The interest rate on post office two- and three-year term deposits was also increased by 20 basis points and 30 basis points, respectively from 5.5% to 5.7% and from 5. 5% to 5.8%.

So the question is, does it make sense to invest now in small savings plans?

The SCSS is a government-backed savings scheme for people over the age of 60, but one can only invest up to Rs 15 lakh per PAN at several banks and post offices. So, you can consider investing Rs 15 lakh each in your name and in the name of your spouse.

According to Hemant Beniwal, certified financial planner and director of Ark Primary Advisors, a financial planning company: “It is a complete debt instrument without any risk. It offers the security of an assured income for the duration of the investment. They also come with the option of premature closing. Finally, the investment may be treated as a deduction under Section 80C.

Beniwal says the new 7.6% interest rate makes it a good option for those looking for a safe long-term investment.

“It is market-linked based on a five-year government bond yield. Interest is paid quarterly and the interest rate is locked in once the investment is made,” adds Beniwal.

Amit Suri, Director and CEO of AUM Wealth, a financial services company, adds, “Rising interest rates for small savings plans should be taken seriously, as these interest rates will not be sustainable for a long period of time. Our assumption is that interest rates would start falling within a year or two. If someone reserves in their money at these interest rates for a specified period in these schemes, it makes a lot of sense. Our advice to people who fall into this category is to reserve their money in these schemes.

Nitin Rao, product and proposition manager at Epsilon Money Mart, a wealth management company, also agrees. He says that although the rate hikes are marginal, they incentivize “investors to park in the money in accordance with their investment objective and time horizon.”

That said, there is also the tax aspect to consider, as the investor will be taxed on the interest earned according to their tax bracket.

According to Rajan Sarkar, Director and Head of Unit, Anand Rathi Wealth, a private wealth management company: “If you have no taxable income, or you are taxed at 10%, you can consider investing in small savings plans. Most banks offer fixed interest rates on deposits a little more than these small savings plans. Post office monthly income plans are a good option if someone is looking for a monthly income. It’s good for retired investors.

However, if you fall in the higher tax bracket, it would be best to consider other options.

Investors can also consider the rollover strategy of a debt mutual fund that holds Government of India Bonds (GoI) and Government Development Loans (SDL) to maturity, in order to eliminate the impact of an increase in interest rates for investors who remain invested until maturity (five years).

“They can expect a 7% pre-tax return if invested to maturity in these papers. The underlying papers will mature within five years of these mutual funds. The tax liability is 20% with indexation, provided investors hold to maturity. It is advantageous for investors who are in the 20% or 30% tax bracket,” adds Rajan.

More importantly, keep asset allocation in mind. “If you have a lack of debt in your investment basket, then small savings plans are a good alternative. For a moderate investor, having around 30-40% small savings plans, it is reasonable to keep the current situation in mind,” says Anant Ladha, founder of Invest Aaj For Kal, a financial advisory firm.