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A Welcome change

Analysis of the recent interest hike in small savings schemes and some expert investment advice. The new rules are expected to come into effect from December 1

The Government, on November 11, announced some positive changes in the personal finance sector. This includes changes in interest rates and investments in Post Office Savings Accounts (POSA), Post Office Monthly Income Scheme (PO MIS) and Public Provident Fund (PPF). The changes will come into effect from December 1.


Illustration/ Jishu

Public Provident Fund (PPF)
The rate of interest on PPF accounts has been increased to 8.60 per cent per year from the current 8.00 per cent per annum. The maximum possible investment in PPF accounts has also been increased to Rs 1 lakh from the current Rs 70,000. The rate of interest for loans taken from your PPF account has been increased to 2.00 per cent per year from the present 1.00 per cent per year.

What it means for you?
PPF accounts are excellent because their returns are completely tax-free as there is absolutely no income tax on the returns. PPF accounts make an excellent avenue to create the core of your retirement corpus � especially if you do not have a provident fund (PF). Raising the limit to Rs 1 Lakh also means that it is at par with Section 80C income tax deduction limit of Rs 1 lakh. Hence your entire investment in PPF would still remain deductible from your income. Although raising the rate of interest on loans from PPF looks like a negative move, it would discourage you from taking money out of your long-term savings, which is actually good for you.

Post Office Monthly Income Scheme (PO MIS)
The rate of interest for PO MIS accounts has been increased to 8.20 per cent per year from the current 8.00 per cent. However, there would be no bonus at the time of maturity (it used to be 5 per cent so far). The duration of PO MIS has been reduced to 5 years from the current 6 years.

What it means for you?
PO MIS is a good option if you want regular, safe, monthly income. With this modest increase in interest rate, you would fetch more out of your MIS accounts every month. Although it is still less than what most bank fixed deposits would get you. The removal of bonus would also effectively lower the rate of return that you get from PO MIS.The reduction in the tenure of PO MIS means you would have your money locked in for lesser time. And you always have the option to renew the account if you want to continue it.

National Savings Certificate (NSC)
The rate of interest for National Savings Certificate (NSC) has been increased to 8.40 per cent per year from the current 8.00 per cent per year. Their maturity period has been reduced to 5 years from the current 6 years. New type of NSCs with a maturity of 10 years bearing a rate of interest of 8.70 per cent would also be issued.

What it means for you?
This reduction in the term means you would have your money locked in for lesser time. If you want to stay invested for longer, you can invest in the 10 year NSCs

Post Office Savings Account (POSA)
The rate of interest for Post Office Savings Accounts (POSA) has been increased to 4.00 per cent per year from the current 3.50 per cent per year.

What it means for you?
Your POSA would get you slightly more interest rate than earlier - although this increase would hardly be meaningful since you are unlikely to keep a significant amount in a POSA anyway. Also now since the saving rate given by banks is deregulated you might get better rate on your saving bank account. Hence there is no significant impact on your investments.

The Larger Picture
The above changes in interest rates on Government schemes are part of a larger scheme of things � the interest rates on most of these schemes would not remain fixed, but would be market linked. That is, these interest rates would be derived from the prevailing interest rates for government securities (G-Secs) of similar maturity, and would be determined on April 1 every year. This means that the rates of interest can and will change from time to time.

This move has been made to bring transparency to the interest rates, and to remove arbitrariness and political interference from the process.

Saurabh Mittal is an investment advisor with SecureLife, an investment advisory firm. You can email him at saurabh@securelifeindia.com

Other Schemes
Kisan Vikas Patra (KVP)
KVP will be discontinued. Anyway it was largely redundant, and its discontinuance should not have any impact on your investments.

Senior Citizens Savings Scheme (SCSS)
There has been no change in the rate of interest for Senior Citizens Savings Scheme (SCSS). It remains at 9.00 per cent per year.

Citizen speak
Smita Shah (61), who works for a non-profit organisation at Cuffe Parade feels that the rulings announced by the government recently is a welcome change. Said Shah, "PPF is non-taxable. Hence, increase in interest rates is definitely good for the account holders. It will definitely be beneficial for people who keep their money in provident funds and have post office savings account. The interest rates should be at par with what banks are offering."

Rukmini Bhatia (83), a freedom fighter from Walkeshwar doesn't think much of the hike in interest rate. "The increase is marginal. What difference does it make?" asked Bhatia. She further added, "I live alone, so may be I will benefit from this small hike in interest rates. What about those, who have a family of four to take care of? In a city like Mumbai, where cost of living is so high, this 0.6 or 0.7 per cent increase will not make a difference. At least 2-3 per cent increase in interest rate should be there." R.Sadagopan (67) echoes a similar sentiment. "The mere increase is an absolute eyewash ahead of the UP elections. It is a way of fooling the public. This marginal increase will not make any difference whatsoever. The government has done it to avoid some tough questions," said Sadagopan from Ghatkopar.

PPF accounts are excellent because their returns are completely tax-free as there is absolutely no income tax on the returns. PPF accounts make an excellent avenue to create the core of your retirement corpus �  especially if you do not have a provident fund (PF)

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