NEW DELHI: Amid record inflows into Senior Citizen Savings Scheme and Mahila Samman Savings Certificate, the government has indicated that it is factoring post-tax returns on small savings schemes, especially the popular Public Provident Fund (PPF), while setting quarterly rates.
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Till September-end, SCSS has seen inflows jump 2.6 times to Rs 74,675 crore, from Rs 28,715 crore in the corresponding period last year, after the Centre doubled the annual investment cap to Rs 30 lakh. On a gross basis, investments are estimated at over Rs 1 lakh crore so far. Similarly, the Mahila Samman Savings Scheme had raked in over Rs 13,500 crore, an official said.
The Mahila Samman Savings Scheme is a one-time scheme that allows women to invest up to Rs 2 lakh at 7.5%. The Senior Citizen Savings Scheme and Mahila Samman Savings Certificate, along with the Sukanya Samriddhi Yojana, which focused on the girl child, have been identified as priority small savings instruments and, along with PPF, have helped the Centre create a cushion due to the rise in inflows, so far this year. Given the current trend in expenditure and revenue, and small savings, the government has the option to lower its open market borrowings, which it has chosen not to do so far, sources said.
It has instead chosen to calibrate interest rates on various schemes, factoring in the tax benefits that the government offers. For instance, investments into PPF, are part of the Rs 1.5 lakh annual deduction that is allowed under section 80C of the income tax. Besides, interest earned on the corpus is exempted from tax.
As a result, for someone in the 30% tax bracket, the return on PPF, which currently fetches 7.1%, works out to close to 9.3%. The interest rates on small savings are linked to market rates and are adjusted every quarter, usually aligned with what banks offer on fixed deposits. Over the last few quarters, rates on schemes such as PPF have been left untouched.
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While the Reserve Bank of India has raised the repo rate – the rate at which it lends money to banks – by 2.5 percentage points since May 2022, PPF has not seen an increase. In contrast, two- and three-year time deposits with post offices have seen interest rates increase by 1.5 percentage point.
According to the formula for fixing small savings rates, PPF depositors are getting 40 basis points (100 basis points equal a percentage point) less, which the shortfall in case of recurring deposits is to the tune of 20 basis points. At the other end of the spectrum, Kisan Vikas Patras, are fetching 24 basis points higher than the 7.26% that they should earn based on the formula linked to the yield on a government security with a similar maturity, RBI said in its latest monthly bulletin.
