India News: Higher Interest Rates for Small Savings.

Small saving may fetch you returns as high as 8.2%

9 JUN, 2011, 09.36AM IST, SUROJIT GUPTA & SIDHARTHA,TNN 
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NEW DELHI: The government is likely to raise returns on small savings schemes such as public provident fund (PPF) over the next two-three months with sharpest rise of up to 70 basis points likely in post office deposits.

Based on present calculations PPF, the most popular scheme, would see interest rate rise by 20 basis points (100 basis points = one percentage point) to 8.2% annually instead of 8% now while senior citizens can hope to get 8.95%
The only scheme which is going be hit would be the five-year Senior Citizen's Savings Scheme (SCSS), where the return is expected to decline by 30 basis points.

A government panel headed by Reserve Bank of India deputy governor Shyamala Gopinath submitted its report to finance minister Pranab Mukherjee . The panel has called for several changes in the structure of small savings schemes and has recommended abolition of Kisan Vikas Patra as well as raising the investment limit in the PPF scheme to Rs 100,000 from the present Rs 70,000.

In case of two other schemes - the Monthly Income Scheme ( MIS )) and the National Savings Certificate (NSC) - the rates would remain the same but their tenure would be cut from six years to five.

The rates would be applicable if the new formula, which is linked to the three-year average rate on comparable government bond, is applicable from July 1.

A senior government official told TOI that in case of schemes such as NSC, the interest rate on offer would be the one applicable in the year of purchase. So, if you invest Rs 1 lakh in NSC now, you would get 8% but it could rise to, say, 8.5% for those purchased in the next financial year.

The interest rate payable on PPF would, however, be fixed at the start of every financial year and the entire corpus would be entitled to the same rate, as is the case with your money lying with the Employees Provident Fund Organisation.

Though the government would take a hit of around Rs 650 crore due to the revamp - which also involves resetting interest rates for state governments that use bulk of the proceeds - the finance ministry is keen to move to the new mechanism at the earliest. "It's more transparent and offers benefits of the rising interest rate environment," said an official.

With most states already on board, the potential risk of derailment is unlikely, the official said. Besides, the government does not expect any political opposition as the returns are rising for almost all schemes.

The official said the panel had consulted all stakeholders and the panel included the finance secretaries of West Bengal and Maharashtra. "The recommendations will be discussed in the government and we can implement it in the next 2-3 months," said the official, who did not wish to be identified. Recommendations of a similar panel had to be forwarded to the National Development Council (NDC) as some states had protested against the proposed changes.

"The present recommendations benefit investors. We are also cutting down on agents' commission. Overall, the recommendations are balanced and links the interest rates to market rates. We don't anticipate any opposition," the official said.
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