Monday, December 5, 2011

Why post office saving scheme have become MORE attractive?

In a bonanza to millions of small savers, the government has increased the interest rates on deposit schemes offered by post offices, such as savings accounts, Monthly Income Schemes (MIS) and Public Provident Fund (PPF).

While the post office savings accounts (POSA) will fetch 4% interest, up from 3.5%, the MIS and the PPF will earn an interest of 8.2% and 8.6%, respectively. The annual investment ceiling in the PPF savings has also been increased to `1 lakh from the present limit of Rs 70,000, but it would be costlier to obtain loans from the savings in the PPF as the lending rate has been doubled to 2%.
 
The new rates will be applicable from the date of notification, which will be announced soon. The decision to hike interest rates, which is in line with the recommendations of the Shyamala Gopinath Committee, will make small savings schemes more attractive and returns would be in sync with the market rates. Here's a snapshot of the decisions taken:
 
Rationalisation of schemes
 
1. The maturity period for the MIS and National Savings Certificate (NSC) reduced from six years to five years.
 
2. A new NSC instrument, with a maturity period of 10 years, to be introduced.
 
3. Kisan Vikas Patras (KVPs) to be discontinued.
 
4. The annual ceiling on investment under the PPF scheme to be increased from Rs 70,000 to Rs 1 lakh.
 
5. Interest on loans from the PPF will be increased to 2% p.a. from the existing 1%.
 
6. Liquidity of Post Office Time Deposit (POTD)—1, 2, 3 & 5 years—to be improved by allowing premature withdrawal at 1% less than the time deposits of comparable maturity. For premature withdrawals between six and 12 months of investment, the POSA rate of interest will be paid.
 
Interest rates on small savings instruments
 
1. The rate of interest paid under POSA to be increased from 3.5% to 4% p.a.
 
2. The rate of interest on small savings schemes to be aligned with the G-Sec rates of similar maturities, with a spread of 25 basis points (bps), with two exceptions. The spread on 10-year NSC (new instrument) will be 50 bps, and on the Senior Citizens' Savings Scheme will be 100 bps. The interest rates for every financial year will be notified before 1 April of that year.
 
3. Payment of 5% bonus on maturity of MIS will be discontinued.
 
4. Assuming the date of implementation of the recommendations of the committee to be 1 December 2011, the rate of interest on various small savings schemes for the current financial year on the basis of the interest compounding/payment built in the schemes will be as mentioned in the table.
 
Commission to agents
 
1. The payment of commission on the PPF schemes (1%) and Senior Citizens' Savings Scheme (0.5%) will be discontinued.
 
2. Agency commissions under all other schemes (except the Mahila Pradhan Kshetriya Bachat Yojana agents) will be reduced from the existing 1% to 0.5%.
 
3. The commission at the existing rate of 4% will continue for the Mahila Pradhan Kshetriya Bachat Yojana agents.
 
4. Incentives, if any, paid by the state/UT governments will be reduced from the commission paid by the central government.
Source: Economic Times

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