PPF, NSC interest rate cut: Are FDs better alternatives to small savings schemes?

The government has cut interest rates on small savings schemes, including NSC and PPF for the January-March period dealing a blow to lakhs of small-time investors. For January to March 2018, the interest rates on these schemes have been reduced by 20 basis points, or 0.2 percentage point, in comparison to the previous quarter.

Lakhs of investors may now rethink and consider other options to park their funds into other plans.

In such cases, fixed deposits may seem to be better alternative than Public Provident Fund (PPF) and National Savings Certificates (NSCs). 

We find out whether it is viable to go with fixed deposits to earn better returns.

Considering fixed deposits schemes with a 1-year tenure, the ones with highest returns are from RBL Bank (7.40%), YES Bank (7.10%) and Lakshmi Vilas Bank (7%), LIC Housing Finance (7.30%) and Bandhan Bank (7.25%).

This comes to average return of 7% for an year. As interest income on fixed deposits is taxable, one  also has to bear a tax deduction of 10 to 30%  on the interest income depending on the range of tax slabs under which the depositor's income is covered.

TDS is deducted on the interest only if the interest amount of the FD is greater than Rs 10,000 per year. The rate of TDS is 10 percent on interest income, in case your PAN number is available with the bank. If you have not sent your PAN card details to the bank, TDS is deducted at 20 percent on interest income.

That amounts to average 5% returns on FDs delivering maximum returns in the current scenario.

Meanwhile, after the reduction in interest rate, PPF and NSCs will fetch a lower annual rate of interest of 7.6 per cent. Kisan Vikas Patra will yield 7.3 per cent and mature in 11 months. The girl child savings scheme Sukanya Samriddhi Account will offer 8.1 per cent from existing 8.3 per cent annually.

The small savings schemes are worth going for in the current scenario when compared with FDs and will keep your returns on a higher track in the long term.