Bounty for savers investing in PPF, NSC and Post Savings Deposit

Be ready to earn more on your PPF, NSC and other small savings deposit schemes from 1^st December 2011.  The interest rates on these investments have been overhauled and shall hence forth earn market linked returns.  The Government has decided to implement the recommendations made by Committee headed by Smt. Shyamala Gopinath, Deputy Governor of Reserve Bank of India in June 2011.  Bachhat had carried an article on the recommendations made by the Committee which can be read here.

           

Changes in Structure of Small Savings Schemes

There have been changes in the small savings schemes available for investors.  Kisan Vikas Patra will be discontinued from 1^st December 2011.  Further, the maturity of post office Monthly Income Scheme (MIS) and National Savings Certificate (NSC) is reduced from 6 years to 5 years.  Investors, willing to invest for longer tenure, shall have one more NSC instrument with a maturity period of 10 years.

As regards Public Provident Fund (PPF), the annual ceiling of contribution which currently is at Rs. 70,000 has been increased to Rs. 1,00,000 annually.   A taxpayer can now avail entire Section 80C benefit of Rs. 1,00,000 by just investing in PPF.  To discourage pre-mature withdrawals, interest rate on advances against PPF deposits is revised to 2% higher than the prevailing PPF interest rates.  Currently it is 1% higher than the PPF rates.

An investor shall be able to make pre-mature withdrawal from post office time deposits but shall earn rate of interest 1% less than the time deposit of comparable maturity.

Thus now the tenure available for investors are 1, 2, 3, 5, 10 and 15 years.

Revised Interest Rates from 1^st December 2011

The rate of interest on small savings schemes shall be aligned with Government Securities’ rates of similar maturity with a spread of 25 basis points (bps).  100 bps is equal to 1 percentage point.  The spread shall be 50 bps for 10 year National Savings Certificate and 100 bps for Senior Citizens Savings Scheme (SCSS).  These interest rates shall be reset every year before the beginning of the financial year based on the market rates at that point of time.  Further payment of 5% bonus on maturity of MIS has also been discontinued.

Based on the prevailing market rates, from 1^st December 2011 till 31^st March 2012, the rate of interest on various small savings schemes has been reset as follows:

Instrument	Current Rate (%)	New Rate (%)
Savings Deposits	3.50	4.00
1 Year Time Deposits	6.25	7.70
2 Year Time Deposits	6.50	7.80
3 Year Time Deposits	7.25	8.00
5 Year Time Deposits	7.50	8.30
5 Year Recurring Deposits	7.50	8.00
5 Year SCSS	9.00	9.00
5 Year MIS	8.00 (6 yr MIS)	8.20
5 Year NSC	8.00 (6 yr NSC)	8.40
10 Year NSC	New instrument	8.70
PPF	8.00	8.60

The above rates shall be reset on 1^st April 2012.  To avoid year-on-year volatility, the committee had suggested a cap of 100 bps so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the market rates fluctuate by higher margins.  Surprisingly, the notification is silent on this aspect.

As recommended by Committee, the commission earned by agents for garnering deposits has also been slashed.  The agent shall not earn any commission on PPF and SCSS.  The commission of 1% earned on all other schemes has also been reduced to 0.5%.  This is a welcome change and henceforth, the motivation of the agent to sell such schemes shall not be commission, but the suitability of the scheme to the investor.  This and similar changes which happened in mutual fund industry earlier, will encourage emergence of fee based financial service industry wherein agents charge customers directly for the services provided by them.

Bachhat’s take

As mentioned in our earlier post, this shall have long term impact on the way individuals save.  For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings.  Reduction in agency commission will ensure that products are sold to investors on the basis of their merits.