Monday, December 5, 2011

Pros and cons of new post office savings rules

Beginning this Thursday, investors in small savings schemes will start earning higher returns. The finance ministry has notified that from December 1 the rate of interest on Public Provident Fund (PPF) scheme in the current financial year ending March 2012 would be 8.6%, up from 8%. 

The government has also allowed higher limit in PPF investments, allowing one to put up to Rs 1 lakh per year in this instru ment, from Rs 70,000 earlier. The rate of interest on the 5-year na tional savings certificate (NSC) has also been hiked from 8% to 8.4% now, while small savings accounts holders in post offices will now get 4% interest, up from 3.5%. 
Interest on monthly investment schemes (MIS) has also been increased to 8.2% from 8%, and on national sav ings certificates (NSC) the hike has been to 8.4% from 8%. A new 10-year NSC will also be available soon. 
There are some disappointments as well. The government is withdrawing Kisan Vikas Patra, on suspicion that this is being used for money laundering. It has also decided to do away with the 5% bonus that MIS customers got at the time of maturity. What is even more disap pointing is that this withdrawal of bonus payout will be applicable even on old ac counts that remain operational on or af ter December 1. 
There is another important change that investors need to be mindful about Earlier interest rates in all small savings schemes were fixed for the tenure of the investment. 
This is changing now: From December 1, the rates of interest on these instruments will be linked to what one can earn in the government bonds, also called Gilts, of equivalent maturity. What this means is returns from these much safer savings instruments will become market-linked and hence variable. On some year it will go up, while on some it will go down. 
This variable rate also means that if you have invested in an NSC of 5 years you rate of interest will be 25 basis points above the yield on 5-year Gilts. For ex ample, if the yield on 5-year Gilts is 8.75%, you will get 9% on your invest ments. And as the corresponding yield changes, the rate of interest on your in vestment will also change each year. 
The good news for senior citizens is that the rate of interest they will get on the 5-year Savings Scheme for them will fetch 100 basis points more than the yield on 5 year Gilts. So in the above example, they will earn at the rate of 9.75%. And in 10 year NSC, one will get 50 basis points above the 10-year yield on Gilts. 
Experts say that under the changed rate structure, PPFs will now give one an annual post-tax return of about 11.3% (provided full income tax benefits are availed by the investor), which is very good. And on top of this, remember, this is a very safe investment.
Source: Economic Times

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