Where To Put Your Savings in A Falling Interest Rates Regime

As the Indian economy continues to mature and inflationary pressures ease, borrowing costs have decreased, leading to a decline in returns from debt-based investments. Falling interest rates in India are beginning to reshape the financial landscape for households and investors.

Lower lending rates make borrowing more attractive, offering relief to homebuyers and consumers, while simultaneously reducing the returns on traditional savings instruments, such as fixed deposits (FDs). This shift is prompting individuals to rethink their financial strategies, weighing the appeal of cheaper credit against the challenge of securing higher-yielding investments.

“While the interest rates on deposits with banks continue to drop, it has not significantly affected the rate of interest which is paid by the EPFO on the provident fund balances. Therefore, salaried individuals seeking higher returns along with the security of a fixed investment de-coupled from the market risks may opt for making additional contributions towards PF in form of voluntary PF contributions,” says Poorva Prakash, Partner, Deloitte India.

While withdrawals from provident fund are generally tax free after five years of continuous service, interest earned on employees’ contribution in excess of Rs 250,000 per annum is liable to tax along with employer contributions to PF in excess of Rs 750,000 per annum and interest thereupon.

Another investment option available to individuals in such a scenario may be the National Pension System (NPS). Through NPS, individuals can park their savings in different asset portfolios based on their risk appetite. At the same time, NPS serves as a means for retirement planning. Therefore, NPS investments must be planned with a long-term horizon in mind as there are restrictions and tax implications on early withdrawals from NPS.

“While investments made in NPS by individuals do not qualify for any tax relief under the new tax regime, employees can avail deduction for employer’s contribution towards NPS under both the new and old tax regimes up to 14 per cent and 10 per cent of their basic salary, respectively,” informs Prakash.

Individuals with a larger risk appetite can choose to save and invest into securities market. Investors usually prefer long-term investment in blue-chip stocks as the market may fluctuate in the short term. The long-term trend is generally upwards and usually surpasses the interest rates.

However, “all market investments are subject to some degree of risk and lower risk may also correlate with a lower return. Dividends earned from shares are subjected to normal taxation. However, both short-term and long-term gains arising from the sale of listed shares in India are taxable at concessional rates of 20 per cent and 12.50 per cent, respectively,” says Prakash.

Falling interest rates in market also translate into reduced cost of borrowing. Therefore, it opens up a path for investors to invest in real estate as well by securing low-cost loans. Real estate has always been considered as a generational investment and falling interest costs mean that there will be many new investors in the sector. This will also cause a demand-lead increase in the investment value for real estate. Individuals can claim up to two properties owned by them as self-occupied and there shall be no tax implications as regards to deemed let out provisions.

Individuals earning rental income from their properties are allowed a standard deduction of flat 30 per cent on the gross annual value of the property. Further, while under the new regime, no deduction is available in respect of a housing loan for self-occupied properties, interest paid on such housing loans is deductible against the rental income from let-out properties.

“Falling interest rates do not mean the end of road for traditional debt-based investments, but it is a time for re-structuring of the investment portfolios. Investment strategies are designed with time horizon and risk appetite in mind. Therefore, if investments are to be made for a shorter time-frame, one may invest in low interest yielding deposits instead of long-term solutions such as high-coupon bonds,” says Prakash.

Individuals who still prefer traditional instruments like FDs and RDs may consider locking in their investments at current higher rates before they decline further. The shifting market underscores that change is the only constant, reminding investors to regularly reassess and realign their portfolios with evolving conditions and long-term goals.