To align with market rates, the government has cut the interest rates on Kisan Vikas Patra (KVP), term and recurring deposits by 25 basis points.
Currently, term deposits of one to three year maturity, KVP and five year recurring deposits offer 25 basis points more than the G-sec rates. Also, the compounding of interest of five year NSC and KVPs will be done on an annual basis from April 1.
The interest rates of small saving schemes will be reviewed every quarter from April 1 and will be notified on March 15 for April-June quarter.
The Finance Ministry expects the interest rate cut will help the economy move to an overall lower interest rate regime which will eventually help low-income and salaried class people, said a press release.
However, the Finance Ministry has not changed the interest rates of Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme due to their social security goals. Also, interest rates on National Savings Certificate and PPF have been left untouched to encourage long term savings.
The Finance Ministry has allowed premature closure of PPF accounts only in genuine cases like serious ailment, higher education, etc. with a 1% penalty on interest rates. “This is permissible with a penalty of 1% reduction in the interest payable on the whole deposit and only for the accounts having completed five years from the date of opening,” says the press release.
Hemant Rustagi of Wiseinvest Advisiors believes that investors should now shift to market linked products. “Currently, interest rates on small saving schemes vary between 8.3% and 9.3%. Reducing small savings interest rates is a positive move. This should nudge investors to invest in fixed income MF schemes which can offer better returns. However, due to constant review of the rates in every quarter, schemes like NSC will become less attractive. ”
Suresh Sadagopan of Ladder7 Financial Advisories feels that investors should wait for the Budget before parking money in such savings schemes.
