Small Savings may undergo major changes

 Instruments

Current Scenario

Recommendation

Savings Account

Effective rate is 3.5% subject to a ceiling of Rs1 lakh (Rs2 lakh for a joint account).
Interest income is tax free.

With Reserve Bank increasing the saving bank deposit rate to 4%, the interest rate on Postal Saving Account may also be increased to 4%;

Removal of ceiling of Rs1 lakh (Rs2 lakh for a joint account) taking into account the need for harmonization with the DTC code removing most tax exemptions.

5 Year Recurring Deposit Scheme

Effective rate of interest is 7.7% per annum. Premature closure of the account is available only after 3 years and only savings bank rate of interest (3.5% p.a.) is paid.

Reduction in the lock-in period of the scheme from 3 years to 1 year;

For premature withdrawal, a 1% lower rate of interest than postal time deposits of comparable maturity may be paid to the small savers;
The interest rates on recurring deposits should be benchmarked to 5 year G-sec.

Time  deposits (of 1, 2, 3 and 5 year maturity)

Effective rates of interest for 1, 2, 3 and 5 year is 6.25%, 6.50%, 7.25% and 7.50% respectively. Account cannot be closed in the 1^st six months; after six months (and before one year), accounts can be closed but without receiving any interest; and after 1 year at a interest rate 2% less than the original rate.

Interest rates on 1 year and 5-year time deposit may be benchmarked to 364 day T-Bills and 5-year G-Sec respectively whereas the interest rate on 2-year and 3-year TD may be determined through linear interpolation between the interest on 1 year and 5 year maturity instruments.

If withdrawn within 6-12 months, savings bank deposit rate may be paid (as against nil at present) while if withdrawn after 1 year, interest rate of 1% less than the interest rate on equivalent maturity instrument may be paid.

Monthly Income Scheme (MIS)

Effective annual rate of interest of 8.82% (inclusive of 5% maturity bonus).

Reduce the term from six years to five years;

Abolish the maturity bonus;

Interest rate should be benchmarked to 5-year G-Sec rates.

Senior Citizens’ Savings Scheme (SCSS)

Effective rate of interest is 9% per annum on a quarterly basis.

Interest rate should be benchmarked to 5-year G-Sec rates.

A spread of 1% over and above the secondary market yield of government securities of similar maturity.

Public Provident Fund (PPF)

The rate of interest is 8% per annum (compounded yearly). The annual investment ceiling is Rs 70,000. The scheme does not permit any withdrawal for the first six years after which limited withdrawal is permitted without any penalty. The scheme also provides loan facility after one year of opening of account but before completion of 5 years, after which normal withdrawals can be availed.

An increase in the limit to Rs1 lakh.

Interest rate on the scheme may be benchmarked to 10-year G-Sec rate.

Withdrawal may be allowed to continue and loans against PPF may not be permitted during the first 3 years.

Interest on advances against deposits may be fixed at 2 percentage points higher than the prevailing interest rate on PPF (as against 1% at present).

NSC & KVP

Effective rates of interest at 8.16% and 8.41% respectively. The term of the NSC is 6 years.

Maturity period of NSC should be aligned to 5 year and the instrument should be benchmarked to 5-year G-sec.

KVP should be discontinued. Instead, another NSC with maturity period of 10 years benchmarked to 10-year G-Sec should be introduced

Instrument

Current Rate %

Proposed Rate %

Savings Account

3.5

4

1 year Time Deposit

6.25

6.8

2 year Time Deposit

6.5

7.2

3 year Time Deposit

7.25

7.5

5 year Time Deposit

7.5

8

5 year Recurring Deposit

7.5

8

5-year SCSS

9

8.7

5 year MIS

8.00 (6 year MIS)

8

5 year NSC

8.00 (6 year NSC)

8

10 year NSC

New instrument

8.4

PPF

8

8.2