How to duck small savings rate cut

Senior citizens will still have a plethora of fixed-return choices


ometimes life gives you these little jolts that remind you to be better prepared for the future. The government’s flip-flop on small savings rates is one such episode. After announcing steep cuts of 40 to 110 basis points, it rolled them back to say that rates that prevailed for the January to March 2021 quarter would continue until June 30.

But now that the government has signalled its intent, it may be best for investors in these schemes to prepare for possible reductions next time around. If you’re a 60-plus individual looking for regular income options, here’s a viable strategy to follow.

Max out SCSS

Even as interest rates on deposits with leading banks and NBFCs have fallen steeply, a government-guaranteed option that has continued to offer better rates is the post office Senior Citizens Savings Scheme (SCSS). The rates on this scheme, which were supposed to be slashed from 7.4% to 6.5% effective April 1, have been retained at 7.4% for one more quarter. This presents a good opportunity to lock into them.

The SCSS account (which can be opened via India Post or leading banks) allows 60-year plus investors to park up to ₹15 lakh in total. It carries a 5-year lock in and offers regular payouts credited quarterly. Once you invest at a specific interest rate in the SCSS, you get the same rate for the next 5 years, making it a predictable option. As a conduit for central government borrowings, the SCSS is safer than every other fixed income option in the market, including bank deposits.

Currently, 5-year deposits for seniors at leading banks such as SBI and HDFC Bank offer 5.8%, making the SCSS’ premium of 160 basis points over them quite attractive.

Bank deposit rates have already reversed from their declines and begun to rise in the last three months. But these rates have a long way to go before they catch up with the SCSS, so it makes sense for seniors to max out their SCSS contributions at ₹15 lakh. If your spouse is 60-plus, your combined limit can go up to ₹30 lakh, with your investments fetching section 80C tax breaks also up to ₹1.5 lakh each. The interest earned is taxable and subject to TDS.

Compared to other government-backed options offering similar rates, a key advantage of the SCSS is the flexibility it offers to break the 5-year lock-in. If you exit within a year, you forego all interest, within 2 years you lose 1.5% and after 2 years, you lose 1%. But such penalties are worth taking for the ability to withdraw money in case of emergencies or to invest in alternatives, should interest rates climb very sharply over the next couple of years.

Limit PMVVY exposure

The Pradhan Mantri Vaya Vandana Yojana, a government-backed pension scheme offered by the LIC, was repackaged and reintroduced last year. The scheme, open only to 60-plus individuals, is available until March 2023. It promises taxable pension at monthly, quarterly, half yearly or annual intervals for 10 years, in return for an upfront lump sum investment. It sets minimum and maximum limits on your lump sum investment at ₹1.56 lakh and ₹15 lakh.

The interest rate on PMVVY is announced at the beginning of every financial year by the government. While the rate for FY22 is yet to be announced, PMVVY’s interest rate is aligned to the prevailing SCSS interest rate.

With the SCSS rate now at 7.4%, it is likely that PMVVY too will offer 7.4% for FY22. Once you’ve locked into the PMVVY in a financial year, you get the same rate of return for the next 10 years.

This offers predictability, but can be a distinct disadvantage if you invest at the bottom of a rate cycle as you will be doing now. Unlike SCSS, you cannot exit the PMVVY early except in the case of critical illness. Therefore, if you’ve already maxed out your SCSS, invest additional sums in PMVVY for decent returns, but don’t try to use up the entire ₹15 lakh limit.

Explore FRSBs

For regular income seekers (not just seniors) who would like to bet on rates rising from here, the Government of India’s Floating Rate Savings Bonds (FRSBs), paying out interest every six months, offer a good option. The rate on these bonds is reset every half year, on January 1 and July 1, at a 35-basis point premium over the interest rate on National Savings Certificates.

The RBI has already announced that the FRSB interest rate will be 7.15% until June 30, based on the NSC rate of 6.8% that prevailed on January 1. Now that the NSC rate has been continued until June 30, it is likely that the FRSB will continue to offer 7.15% for the rest of this fiscal.

Should interest rates rise next year, FRSBs will help you benefit from the rise too, given their floating resets. FRSBs carry a 7-year lock-in period and are sold through specially-designated branches of 11 nationalised and 4 private banks. Your holdings will be captured in RBI’s Bond Ledger Account and you may need to apply physically. The bonds only offer a payout option and the interest is taxable. FRSBs set no limits on the age of entry or maximum investments and you can use them, subject to your ability to lock in money to supplement SCSS AND PMVVY.

We are at rock-bottom in the current rate cycle with inflation rearing its head and market interest rates just beginning to rise. Therefore, it is not advisable to invest all your debt money in long lock-in instruments mentioned above. Do park at least 20% of your debt allocations in up to 1-year bank deposits and high-quality debt mutual funds, so that you can capitalise on better rates if they become available in six months or one year from now.

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