The Government has recently accepted the recommendations of former RBI deputy governor Shyamala Gopinath panel which would help investors earn higher interest on small savings schemes such as public provident fund and post office deposits. The schemes are now under the market-linked interest rate system.
What is market-linked interest rate system for small savings scheme?
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One of the most significant recommendations by the Shyamala Gopinath panel was making the returns of small saving schemes market-linked. This means that now from this financial year, the rates for small saving instruments will be benchmarked to those of government securities (G-secs) of similar maturity periods with a positive mark-up of 25 basis points (bps).
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However, for Senior Citizen’s Savings Scheme (SCSS), the mark-up is 100 bps and for the new National Savings Certificate (NSC) with a tenor of 10 years, the mark-up is 50 bps.
So if a 10-year G-sec yields 8%, then the rate of interest for Public Provident Fund (PPF) would be 8.25%, 8% plus a mark up of 25 basis points. The government would notify the interest rates applicable for the year on various instruments before 1 April every year. Kindly note this.
What are possible impacts?
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The small savings schemes that would translate into higher returns for now. Till now, the government had the flexibility of offering different rates at different points of time, but that has not been the case.
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Instruments such as PPF, NSC and SCSS have provided more or less stable interest rates for years now. For instance, PPF has been giving 8% for about eight years.
But, Can the market linked rates go down also?
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Yes. This is because the rates would vary every year depending on G-secs yields. Generally, G-secs yields rise in a tighter liquidity environment and fall in case of ample liquidity. The interest would also depend on the Reserve Bank of India. In a high interest rate regime, yields on G-Secs are higher and are lower during low interest rate regime.
What are other structural changes approved?
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Ceiling on investment under PPF has been raised to Rs 100,000 from Rs 70,000
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Interest on loans from PPF raised to 2% per annum from 1%
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Kisan Vikas Patra have been discontinued now.
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The maturity for Monthly Income Scheme (MIS) and National Savings Certificate (NSC) would be reduced to five years from six years.
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New National Savings Certificate with 10-yr maturity also to be introduced
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Maturity for Monthly Income Scheme and National Savings Certificate to be cut to 5yrs from 6yrs
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Interest rate on post office savings account to be raised to 4% from 3.5%
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Commission on PPF (1%), Sr Citizens Savings Scheme (0.5%) discontinued
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Commission on all other schemes except Mahila Pradhan Kshetriya Bachat Yojana reduced to 0.5% from 1%
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Commission of 4% to continue for Mahila Pradhan Kshetriya Bachat Yojana NSC, MIS maturity period set to be reduced to 5 years
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and a new NSC instrument with a maturity of 10 years would be introduced.
But Kisan Vikas Patra is popular. Why then it was discontinued?
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Shyamala Gopinath panel had said in its report that continued popularity of both Kisan Vikas Patra (KVP) and NSC among the urban population who are not all small savers could be prompted by an incentive to avoid tax. The KVP is more popular as it is a bearer-like certificate due to its ease of transfer. It also has an in-built liquidity due to the regulated premature closure facility offered in the scheme. However, in view of the recent developments on Anti Money Laundering/CFT front, the committee recommends that KVP should be discontinued.
What are overall implications on PPF?
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The investment ceiling for PPF has been increased from Rs. 70,000 to Rs. 1 lakh. So for the current financial year, FY12, we can pump in an additional Rs. 30,000 if we have already invested the maximum.
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The entire Rs. 1 lakh will qualify for deduction under section 80C of the Income-tax Act. However, the interest on loans from PPF has been increased from 1% to 2% per annum.
What is overall impact on Post office time deposits?
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In order to make postal time deposits more liquid, the guidelines have allowed premature withdrawals. Currently, Post Office Time Deposit (POTD) of varying maturities may be prematurely withdrawn with interest payable @2% below the applicable rate. This 2% ‘penalty’ has been brought down to 1%.
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In other words, now pre-mature withdrawal can be done at a rate of interest 1% less than the time deposits of comparable maturity. Currently, no interest is paid on premature withdrawals between 6 to 12 months. Now even on such withdrawals the Post Office Savings Account (POSA) rate of interest will be paid.
What is for investors ultimately?
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Instruments such as PPF, NSC and SCSS have provided more or less stable interest rates for years now. For instance, PPF has been giving 8% for about eight years. Now they can expect more returns.