The government has raised the rates of interest on small savings schemes and has also raised the investment ceiling on the popular public provident fund (PPF) from Rs 70,000 to Rs 1 lakh. This is part of the series of updates that will help you with your financial management and planning.

Amid the cheer that it brings to small investors, it’s important to note the fine print. The interest rates on all Small Savings Schemes will be dynamic. So while it has gone up this year, it is market linked and will not be fixed for life. The rate of interest on most small savings schemes will be linked to the government securities of similar maturity and usually offer 0.25 per cent more than the yield on the G-Sec.

Jayant Pai, Vice President, PPFAS says that “From now on, you will not be able to enjoy the best of all worlds viz. High Security, Income Tax Benefits and interest rate visibility for long tenures. In the case of Public provident Fund, interest rates were semi-dynamic to some extent but now this has been extended to all instruments.”

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The interest rate increases on the small savings instruments were generally higher than those recommended by a committee headed by RBI deputy governor Shyamala Gopinath, which submitted its report in early June after a comprehensive review of the national small savings fund (NSSF).

Here are the important pointers of the recommendations that needs to be notified before it comes into effect.

• The interest rate on the post office savings accounts was raised to 4 per cent from 3.5 per cent. (RBI recently deregulated savings bank rates, prompting several private banks to offer as much as 6 per cent. These banks are Yes Bank and Kotak bank)
• The 5-year NSC will carry a rate of interest of 8.4 per cent against 8 per cent at present. The 10-year NSC will offer 8.7 per cent.
• The maximum investment in post office savings bank account has been kept unchanged at Rs 1 lakh for individual accounts and Rs 2 lakh for a joint account.
• The PPF account holders will be pleased to learn that they will now earn a rate of interest of 8.6 per cent against 8 per cent at present.
• On a flip side: if they opt to take a loan from the PPF account, they will have to pay a higher rate of 2 per cent against 1 per cent at present.
• The National Savings Certificate (NSC) — a preferred tax-saving instrument — will now be offered in two maturity brackets of five and 10 years.
• The new small savings rates will come into effect from dates that will be spelt out in a separate notification. “The interest rate for every financial year will be notified before April 1 of that year,”
• The government has accepted the committee’s recommendation to scrap the Kisan Vikas Patra (KVP) — a popular cash certificate which currently doubles investment in eight years and seven months. The committee had said that the KVP was a bearer-like certificate with a regulated premature closure facility and was open to abuse by tax dodgers. They can be bought or sold without going to the post offices.
• The KVP accounted for 25.58 per cent of the total outstanding of Rs 619,908 crore under all small savings schemes at the end of March 2011. Once the scheme is wound up, black money operators who have used the KVP route for years will have to look for another place to hide their loot.

The NSC, however, isn’t expected to qualify as a tax-saving instrument after April next year when the government is due to implement the direct tax code that awaits parliamentary approval.

The maturity period on the evergreen post office monthly income scheme has been reduced to five years from six at present with the interest rate to be realigned to the five-year government security (G-Sec). It will pay 0.25 percentage point more than the yield on the five-year G-Sec.

MIS account holders will, however, no longer get the 5 per cent bonus on maturity.

There are, however, two exceptions: the 10-year NSC will offer half a percentage point above the G-Sec yield. The senior citizens’ savings scheme will offer 1 percentage point more than the 15-year G-Sec.

The investment ceiling of Rs 15 lakh on the senior citizens’ savings scheme hasn’t been changed.

Interestingly, the government has decided to slap a penalty for premature withdrawal from post office fixed deposits. Until now, one could withdraw a post office fixed deposit without any penalty after the expiry of six months from opening the account.

Now, on premature withdrawal a year after opening the account, the applicable interest rate will be one percentage point less than the interest rate payable on fixed deposits of a similar maturity. If the fixed deposit is withdrawn before 12 months from opening the account, the depositor will get only 4 per cent interest.

The government has also changed the agency commission for small savings schemes. Agents selling post office small savings schemes will no longer earn any commission on selling PPF and senior citizen savings schemes (SCSS).

For all other schemes, the agency commission has been reduced to 0.50 per cent from 1 per cent.

You may like to read more about the financial instruments and financial players.

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