Interest rates on small savings schemes for financial year 2014-2015

Government has announced interest rates on small savings schemes for financial year 2014-2015.  This is in line with recommendations of Shyamala Gopinath Committee for Comprehensive Review of National Small Savings Fund.

Interest Rates on small savings schemes

While interest rates for most of the instrument types have remained unchanged, rates on post office time deposits have been revised upwards by 10 bps to 20 bps (100 bps is equivalent to 1 percentage point.).  Public Provident Fund remains one of the best option for long term secured investment.

Tax planning and months of February and March

Sanjana and Sanjay were out on a stroll early wintry Thursday morning of February in Mumbai, which generally is a rarity for this city.

“What a pleasant weather today is!” Sanjana noticed and asked, “Let’s go outdoors during the weekend and enjoy the nature. What say, Sanjay?

“It’s a good idea and weather is also perfect for a day’s outing. But I have some important personal work to do and shall not be able to join you.” Sanjay replied.

“Oh! You and your so called important personal work!” Sanjana exclaimed, “You always have your excuses ready for everything!”

“No Sanjana”, Sanjay replied in a bit serious mood, “it’s already February and I need to do my tax related investments and planning for the year.  I need to submit the documents to my employer in next few days.

“I don't get any time to do this during weekdays and need to complete it during the coming weekend.  We shall plan for outing some other day, Sanjana.”

“You are not yet through with your tax related investments, Sanjay?” Sanjana quizzed, “I never expected you to be lazy in such matters.”

Irked by Sanjana’s question, Sanjay responded “Now where laziness comes in this? Last quarter of the year is meant for tax related investments and planning and I am bang on time.  Only issue is it is not possible for me to do it during weekdays and hence I am doing it during my off time.”

“That’s the problem with all you guys.” visibly upset Sanjana said, “You start your tax planning activities in the month of February or worst in March.  You wait till the end of the year and then start lamenting about it!”

Clueless Sanjay questioned, “Can you please elaborate on this?”

“I don’t want to ruin your pleasant Thursday morning.” Sanjana replied, “But still it is important for you and all others who start their tax related activities late to understand.

“Tax planning should not get started during the end of the year, but should be carried out right at the outset of the year.  By this what I mean is it should be carried out in the months of April or May.”

Still not convinced, Sanjay ask her to explain this further.

“Listen, whatever activities you are planning to do right now - like investments in PPF or tax savings mutual funds, insurance premium, etc - can take place anytime.

“Infact I do all these things in the month of April itself so I need not worry about my tax investments in the month of February or March.   Now all I need to do is take a print out and submit the proof to my employer.  That’s all!”

“That’s all?” Sanjay said, “How is this possible?  If there is a way to do all this earlier during the year, I am all ears.  Tell me how I can do that.”

“It’s simple.” Sanjana started explaining, “All you need to do is plan and start early.  Let’s say you are planning to invest Rs. 1 lac in PPF during the year.  All you need to do is give your bank standing instructions to transfer Rs. 10,000 p.m. from your savings account to your PPF account.  Similarly for mutual fund investment, you can start a SIP and invest during the year in ELSS scheme.  You can structure all your investments in a similar fashion.”

“This is interesting and very much practical.  I never thought about it in this way.” said Sanjay.

“As regards home loan and interest deductions, EMI on home loan is paid monthly so you need not do anything about it.  Same applies in case you pay rent periodically to your landlord.  You can also plan purchasing your insurance policies such that the premium is due early during the year so that is also taken care of.  Have I missed out anything?” asked Sanjana.

“You have covered almost everything.  For things like medical bills, etc. these gets accumulated during the year as and when the expense incurs.  All I need to do is keep record of these things and bingo I am free for you during the weekend for outing!” exclaimed Sanjay.

“Yes” said pleased Sanjana, “This is not only the most effective way, but also helps you to plan your investments quite early during the year.  This time I absolve you from the outing but next year I don’t want you to blubber about the same thing again!” winked Sanjana.

How are you planning your tax investments?  Do share your experiences and thoughts with other readers in the comment section.

Change in interest rates of PPF and other small savings schemes

Finance ministry has announced revised interest rates on public provident fund, national savings certificates and other small savings schemes.  These interest rates shall be applicable for financial year 2013-2014.  As we had noted earlier, interest rates of such schemes are now linked to market yields on government securities of comparable maturities and shall be revised every financial year.

Overall there has been a reduction in interest rates by 10 basis points (100 basis points is 1 percentage point) for all savings schemes except for saving deposits on which interest rates continues to be 4% and 1 year time deposits (8.2%).  Interest rates on PPF from April 2013 shall be 8.7% p.a. as against 8.8% p.a. earlier.

The table below summarizes the changes in interest rates:

Scheme	Existing interest rate	Interest rate w.e.f 1st April 2013
Savings Deposits	4.0	4.0
1 Year Time Deposit	8.2	8.2
2 Year Time Deposit	8.3	8.2
3 Year Time Deposit	8.4	8.3
5 Year Time Deposit	8.5	8.4
5 Year Recurring Deposit	8.4	8.3
5 Year SCSS	9.3	9.2
5 Year MIS	8.5	8.4
5 Year NSC	8.6	8.5
10 Year NSC	8.9	8.8
PPF	8.8	8.7

Overall there has been negligible change in the interest rates as compared to 2012-13.

Hassle-free way to invest in PPF

Banking is the sector which has benefited the most on account of advancement in information technology.  Today, though the number of transactions with bank has increased, one hardly visits the bank’s branch.  Most of the things are done at a click of the mouse or through ATM.

Technology has changed the way we make payments with electronic payment mode preferred by customers nowadays.  Electronic payment mode via National Electronic Funds Transfer or NEFT as it is popularly known can be used to make payment to Public Provident Fund (PPF).

Using NEFT to invest in PPF

We are used to investing in PPFs by going to the bank or post office, filling up the challan and depositing the cheque or cash as the case may be.  With the advent of NEFT, one can remit the money to PPF account at a click of mouse.  No more need to go to bank branch.  It is not necessary that one should have the savings / current and PPF account in the same bank.  One can transfer money even if both the accounts are in different banks.  However, this facility can only be availed by those having PPF account in bank and not in post office.

 

Personal Experience: 'SIP in PPF'

I am using this facility for my PPF account in State Bank of India and I am sure similar facility should be available for investors having PPF account in other banks.  I use the NEFT facility provided by ICICI bank, where my savings account is, to transfer money in SBI PPF account.

Last year, I invested a lump sum amount at the end of the year via NEFT.  This year to ensure that I invest regularly, I created standing instructions to transfer a fixed amount every month at a fixed date to the PPF account.  In other words, I created a SIP in PPF to ensure timely investment.  By providing standing instruction for the entire year, I have taken care of my full year’s PPF investment in just few minutes and clicks!

In PPF, interest is calculated on the lowest balance between the close of the fifth day and the end of the month.  Hence my standing instructions are for crediting the PPF account on the very first day of the month.  One can opt for any date between 1st to 4th to ensure maximum interest benefit.

This is a great way of investment in PPF and sets oneself free from the hassle of remembering the amount and date of investment in PPF account.

          Also read – Are you aware about the unique features of PPF?

However, keep the following important points in mind:

1.   This facility is available only for investors having PPF account in banks and not for those having it in post office.

2.   One can make maximum 12 investments in PPF account in a financial year with an overall limit of Rs. 1,00,000.  Ensure that you do not breach this.

3.   It is advisable to check the PPF account every month for the first couple of months to ensure credit is happening properly.

How do you invest in PPF?  Have you ever invested via NEFT facility?  What are your views on ‘SIP in PPF’?

PS:  This post was inspired by Monika Halan's tweet on PPF and my response to it.

Interest rates on PPF and other savings schemes revised from 1st April

On 1st December 2011, Government had aligned interest rates on small savings schemes such as PPF, NSC, etc with rates of Government securities.  Further the rates were to be reset in April month every year based on market rates prevailing at that point of time.


On 26th March, Government has announced rates on such schemes which shall be applicable from 1st April 2012 till 31st March 2013.  Rates for all the schemes, except for savings deposits, have been increased between 20 basis points to 50 basis points.  100 basis points is one percentage.


The table below compares the existing rate of interest with the new rates.

Scheme	Existing interest rate	Interest rate w.e.f 1st April 2012
Savings Deposits	4.0	4.0
1 Year Time Deposit	7.7	8.2
2 Year Time Deposit	7.8	8.3
3 Year Time Deposit	8.0	8.4
5 Year Time Deposit	8.3	8.5
5 Year Recurring Deposit	8.0	8.4
5 Year SCSS*	9.0	9.3
5 Year MIS	8.2	8.5
5 Year NSC	8.4	8.6
10 Year NSC	8.7	8.9
PPF	8.6	8.8

*SCSS is Senior citizen savings schemes.  


For more details about these schemes and changes made therein last year, click on this link.

How your secured savings landscape is bound to changed?

• Interest rates on Public Provident Fund to be linked to the market yields on government securities of comparable maturity, 
• Annual reset of interest rates of NSC, PPF, etc and 
• Discontinuation of Kisan Vikas Patra instruments.    

These and many other recommendations shall become reality if the Government accepts the last week’s report of the committee headed by Smt. Shyamala Gopinath, Deputy Governor of Reserve Bank of India.  The committee was formed to recommend reforms required in overall administration of National Small Savings Fund (NSSF). 

Following are the small savings schemes covered under NSSF and on which the recommendations are made in the report:

Schemes / Rules	Implementing Agency
Post Office Savings Account	Post Offices
Post Office Time Deposit – 1, 2, 3 and 5 years	Post Offices
Post Office Recurring Deposit	Post Offices
Post Office Monthly Income Account (MIS)	Post Offices
Senior Citizen Savings Schemes (SCSS)	Post Offices and designated branches of public sector bank
Kisan Vikas Patra (KVP)	Post Offices
National Savings Certificate (VIII Issue) (NSC)	Post Offices
Public Provident Fund (PPF)	Post Offices and designated branches of public sector bank

 Source: Committee Report

The report acknowledges the importance of small saving schemes:

"Small Saving schemes have been always an important source of household savings in India. Although these instruments are technically not Government Securities and do not have any explicit Government guarantee, their legacy has given them characteristic of being equivalent to that of a Sovereign liability.  These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument.  At the same time, these instruments have been treated as a means of providing social benefit to the small savers."

Hence the benefits these schemes provide to various sections of the population especially small savers are beyond doubt.  In this article, Bachhat list downs key recommendations made by the committee which directly impacts the investors.

Changes in interest rates:

One of the key recommendations of the committee relates to the interest rates.  The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on Central government securities of comparable maturities and should be reset yearly.  It means that as the interest rates of government securities rises, the interest on these securities shall also increase and vice versa. 

The committee has; depending on the instrument, its liquidity and its tenure; also recommended a spread of minimum 25 basis points (bps) vis-à-vis government securities of comparable maturities. 100 bps is equal to 1 percentage point.  The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps).  For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%.

Further, to avoid year-on-year volatility, cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins.  These rates shall be fixed in advance and shall be known before the start of the financial year.

Committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%.  Further, the interest should be calculated on a daily basis on such deposits.

Other Recommendations:

1.     Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.

2.     Abolition of 5% maturity bonus on Monthly Income Scheme and reduction in tenure from 6 years to 5 years.

3.     Increase in annual investment limit for PPF to Rs. 1 lakh.  To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).

4.     NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates.  No income tax exemption under Section 80C on accrued interest from NSC.

5.     The committee has also recommended reduction in commission paid to agents for the products sold.  The table below gives the existing and the proposed commission structure.  This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them.

Schemes	Existing Commission %	Proposed Commission %
Kisan Vikas Patra	1	0.5
Post Office MIS	1	0.5
Post Office Time Deposits	1	0.5
National Savings Certificates	1	0.5
Senior Citizen Savings Schemes	0.5	NIL
PPF	1	NIL
Post Office Recurring Deposits	4	Reduce 1% p.a. for 3 years. 1% thereafter.

Source: Committee Report

Effect on the current interest rates

Assuming that the Government accepts these proposals and implements the same with effect from 1^st July 2011, the revised administered interest rates based on above recommendations shall be as follows:

Administered Interest Rates for July 1, 2011 to March 31, 2012

Instrument	Current Rate (%)	Proposed Rate (%)
Savings Deposits	3.50	4.00
1 Year Time Deposits	6.25	6.80
2 Year Time Deposits	6.50	7.20
3 Year Time Deposits	7.25	7.50
5 Year Time Deposits	7.50	8.00
5 Year Recurring Deposits	7.50	8.00
5 Year SCSS	9.00	8.70
5 Year MIS	8.00 (6 yr MIS)	8.00
5 Year NSC	8.00 (6 yr NSC)	8.00
10 Year NSC	New instrument	8.40
PPF	8.00	8.20

Source: Committee Report

Bachhat’s take

Above recommendations, if implemented, will 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.  Though these recommendations shall bring year-on -year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability. 

Do you agree with the recommendations made in this report?  Do share your views and suggestions on this article in the comment section below.