The government has drastically slashed interest rates of small savings to align them closer to market rates. The popular Public Provident Fund (PPF) will yield 8.1% from April 1 compared with 8.7% at present and Kisan Vikas Patra will fetch 7.8% against 8.7% now. The five-year National Savings Certificate (NSC) will get an annual return of 8.1% against 8.5% and Sukanya Samriddhi Account will fetch an interest rate of 8.6% as against 9.2% at present. The rate will be reset every quarter based on the average month-end G-sec rates of comparable maturity in the preceding three months.
At present, post office term deposits of one, two and three years fetch an interest rate of 8.4% but from April 1, a 1-year term deposit will get 7.1%, 2-year deposit will earn 7.2% and 3-year deposit will attract interest of 7.4%. The five-year fixed deposit will fetch 7.9% as against 8.5% at present.
The government has removed the spread over G-secs on KVP and term deposits. However, PPF will continue to earn 25 bps more than the average 10-year yield on government securities. The 100 bps spread for senior citizen savings scheme will continue.
Investors of small savings schemes will now need to realign their portfolio and look for products which fetch higher tax-free returns. Equity and long-term bond investors will tend to benefit from the rate cut. Analysts say individuals should look at fixed maturity plan offered by mutual funds and get indexation benefit after one year.
Banks have argued that high rates offered on small savings schemes made it tougher for them to lower deposit rates, eventually delaying monetary policy transmission despite successive rate cut by the Reserve Bank of India. In fact, while the central bank has cut rates by a cumulative 125 bps in 2015, banks have lowered their lending rates by only 66 bps. A Nomura research note says there has been a strong positive correlation between funds accumulated under small savings schemes and the difference between small savings and bank deposit rates.
Analysts say that despite the cut in rates, individuals should invest in PPF as it builds a tax-free retirement corpus. Sushil Jain, national head, Financial Planning & Client Connect, Bajaj Capital, says PPF is meant for those people who do not have any investment plans for their retirement like self employed and professionals as compared with the salaried class who contribute to Employees’ Provident Fund.
For individuals, PPF is the most preferred investment option as it is tax-exempt at all stages. A resident Indian can open a PPF account and the subscriber can even open another account in the name of minors, but the maximum investment limit will be R1.5 lakh by adding balance in all accounts. Deposits made under PPF qualify for deduction from income under Section 80C of the I-T Act, where the ceiling is R1.5 lakh a year. The PPF account matures after 15 years and can be renewed every 5 years thereafter.
Non-residents, however, cannot open a new account, but can continue their existing accounts till its maturity, without extensions. While premature closure of account is not allowed, one can withdraw money every year from seventh financial year from the year of opening the account.
Similarly, Sukanya Samriddhi Account (SSA) enables parents of girl child to build a corpus for her education and marriage expenses. The account can be opened with a minimum deposit of R1,000, after which the guardian can deposit any amount in multiples of R100. The upper limit of deposit in a financial year is R1.5 lakh. Like PPF, an individual who invests in SSA will get tax deduction at the time of investment every year and even the returns generated will be tax-free.
