In an effort to update and boost small savings schemes, the Union Government on Friday announced that both the ceiling and the interest rate for Public Provident Fund investments have been increased as well as make some changes in other small savings schemes. Let's see what these changes are:
The ceiling is now Rs. 1 lakh p.a. as against earlier limit of Rs. 70,000 p.a.
The interest rate is revised to 8.60% p.a. from 8% p.a.
This will remain tax free on maturity, continuing with the Exempt-Exempt-Exempt model for PPF. So this is the equivalent of a very attractive pre-tax interest rate of 12.28% (considering a 30% tax bracket).
The small savings scheme Kisan Vikas Patra has been discontinued.
Post Office Savings Accounts
Post Office Savings accounts will now earn 4% instead of 3.50%.
Monthly Income Scheme & NSC
In addition, the NSC has been revamped. The maturity for both MIS and NSC has been reduced from 6 years to 5 years, and the interest on these schemes has been increased from the earlier 8% to 8.20% and 8.40% respectively.
There will also be a 10 Year NSC available offering 8.70% interest.
The 5% bonus given on maturity of the MIS has however been scrapped.
The rationale behind the move...
The Finance Ministry has said "The rate of interest on small savings schemes will be aligned with the G-Sec rates of similar maturity, with a spread of 25bps, with 2 exceptions. The spread on 10-yr NSC will be 50bps and the spread on Senior Citizens Savings Scheme will be 100bps. The interest rates for every financial year will be notified before April 01."
The decision to increase interest rates on small savings schemes has stemmed from the volatility of cash flows into and out of small savings schemes, when compared with corresponding safe rates of return available in the market.
Currently, we are in a period of very high interest rates, which means the market has plenty of attractive investment opportunities available, including by way of Bank and Corporate FDs. As these rates (post tax) are in many cases higher than the rates offered by small savings schemes of comparable tenure, these schemes have seen significant outflows, reducing the amount of money in the Government's coffers.
To staunch the outflows and also to bring rates in line with the market, the Government has made this move.
This will make small savings schemes more attractive to investors. Returns will be in sync with market returns.
When will it take effect?
The date is pegged at Dec 01, 2011.