An Analysis of recent (proposed) hike in Small Savings Schemes Interest Rates
I have been receiving lot of queries everyday seeking clarification about the impact of proposed interest rate hike in small saving deposits. This article is basically intended to give clarifications for all the mails which I have received in this connection. So I am not replying to each every mail individually, you can find answer to your question here itself.
In my earlier mail, I have communicated to you the good news of proposed increases in the Government Small Savings Deposits Schemes and PPF interest rates. Now I would like to comment on the impact of these interest rates hikes and other related changes. As I mentioned in my earlier mail, now onwards the interest rates offered for Post Office Monthly Income, National Savings Certificate, Public Provident Fund and Senior Citizen Schemes etc are going to vary every year. From 1st December, 2011, the return on small savings deposits would become market-linked and aligned with the G-Sec rates (Government Securities). The net result is, the rate of interest offered would come down whenever there is a downward revision of interest rates, like wise it will go up in case there is an increase in the bank rates. The interest rates for every financial year will be notified before 1st April of that year, it is assumed that, there will not be more than one rate changes during a particular financial year.
Public Provident Fund (PPF) - Earlier, the investors were sure about the amount which they are going to receive on maturity, in that aspect PPF forms an integral part of the long term financial planning, especially of the middle and the lower middle income groups. The return on PPF has been increased to 8.6 % for this year. However, going forward there would be no fixed return element attached to it. Eg. If someone invest Rs. 8,300.00 every month continuously for 15 years he/she can build a tax free asset of around Rs. 3,051,500.00 provided if they get 8.6% for the entire 15 years. But now we are not sure about the future interest rate changes, so it is difficult to make an estimate on the maturity amount, making it more difficult for you to work towards a long term financial goal, like building retirement/marriage/education corpus etc.
The income received from PPF is fully exempted from income tax (as of now, this may change in future also) and also up to Rs. 100,000 you can reduced from your total income u/c 80C of Income Tax Act while calculating the taxable income. Interest on loan from PPF will be increased to 2% from the existing 1% , so If you want to make the most of your PPF account, be disciplined and contribute every year and do not take loans from the account at the higher rate, this will directly reduce the effective rate of return.
National Savings Certificate (NSC) - The maturity period of NSC will be reduced from 6 years to 5 years and interest rate would be increased to 8.4% from the present 8.00%. But this rate hike is not attractive when compared to Tax Savings Term Deposits offered by schedule banks. Banks are offering upto 9.5% interest on 5 year period tax saving fixed deposits. But, it is pertinent to note that, the interest income earned on bank deposit is taxable. NSC interest income is also taxable but Interest accrued on NSC deposits is eligible for tax reduction U/s 80C. It is also proposed to introduce a new instrument of NSC with 10 year maturity with 8.70% interest.
Post Office Monthly Income Scheme (POMIS) - The maturity period of POMIS will be reduced to 5 years from 6 years and annual interest rate would be increased to 8.20% from the present 8.00% and also discontinued the option of 5% maturity bonus. Now a day's schedule banks are offering interest up to 9.50% for 5 year deposits. Urban Co-operative/ District Co-operative banks/Service Co-operative Banks are paying even more.
Post Office Term Deposits – 8% for five years deposit. Not attractive when compared to the interest rates offered by schedule banks
Senior Citizens Savings Schemes (SCSC) – Present interest rate 9.00% no hike in interest is proposed.
Kisan Vkas Patra (KVP) will be discontinued
Assuming the date of implementation of the recommendations of the Committee as 1st December, 2011, the rate of interest on various small savings schemes for current financial year on the basis of the interest compounding/payment built in the schemes, will be as given below:-
| Instrument | Current Rate (%) | Proposed Rate (%) |
| Savings Deposit | 3.50 | 4.0 |
| 1 year Time Deposit | 6.25 | 7.7 |
| 2 year Time Deposit | 6.50 | 7.8 |
| 3 year Time Deposit | 7.25 | 8.0 |
| 5 year Time Deposit | 7.50 | 8.3 |
| 5 year Recurring Deposit | 7.50 | 8.0 |
| 5-year SCSS | 9.00 | 9.0 |
| 5 year MIS | 8.00 (6 year MIS) | 8.2 |
| 5 year NSC | 8.00 (6 year NSC) | 8.4 |
| 10 year NSC | New Instrument | 8.7 |
| PPF | 8.00 | 8.6 |
Best Regards
Prakash Nair
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