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Positive Changes For Small Saving Schemes and Public Provident Fund (PPF) – What It Means For You

The Government had recently announced many small changes that should bring cheer to you!

This includes changes in Post Office Savings Accounts, Post Office Monthly Income Scheme (PO MIS), and Public Provident Fund (PPF).

Following are the details and their implications for you.

 

Public Provident Fund (PPF)

The rate of interest Public Provident Fund (PPF) accounts has been increased to 8.60% per year from the current 8.00% 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 year from the present 1.00% per year.

 

What it means for you

Public Provident Fund (PPF) accounts are excellent because their returns are completely tax free – 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 provident fund (PF).

With the increase in the interest rate for PPF accounts, you have all the more reason to invest in them! So try to max out the investment limit and try to invest Rs. 1 Lakh in PPF towards your retirement corpus.

Raising the limit to Rs. 1 Lakh also means that it is on par with Section 80C income tax deduction limit of Rs. 1 Lakh – 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 Post Office Monthly Income Scheme (PO MIS) accounts has been increased to 8.20% per year from the current 8.00% per year. However, there would be no bonus at the time of maturity (it used to be 5% 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 FDs 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 year from the current 8.00% 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% 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. Ifyou want to stay invested for longer, you can invest in the 10 year NSCs.

 

Kisan Vikas Patra (KVP)

Kisan Vikas Patra (KVP) will be discontinued.

 

What it means for you

KVP 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 year.

 

Post Office Savings Account (POSA)

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

 

What it means for you

Your PO Savings Account 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 PO Savings Account anyway.

 

The Larger Picture – Market Linked Interest Rates

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 1st April 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.

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