Wednesday, June 8, 2011

Give higher returns on PPF, post office savings: Panel

Give higher returns on PPF, post office savings: Panel

NEW DELHI: There is some good news for millions of investors who depend on small savings instruments such as post office savings and public provident fund scheme.

A committee set up by the finance ministry has recommended that the annual PPF limit be enhanced from the present level of Rs 70,000 to Rs 1 lakh besides changing the interest rate structure. Unlike the present system where rates have not changed during the UPA regime, the panel headed by RBI deputy governor Shyamala Gopinath has suggested the return on all small saving schemes, other than post office savings account, be linked to the rate paid on government securities.

So, in a rising interest rate environment like at present, investors would benefit and would not merely have to pay higher EMIs.

The committee, which submitted its report to finance minister Pranab Mukherjee, has recommended that the rate of interest be at least 25 basis points higher than the g-sec yield. For senior citizens the spread should be at least 100 basis points higher. If the proposal is accepted, based on the present interest rate, PPF accounts would be close to 8.5%, instead of 8%. In case of senior citizens, the returns would be 9.25%. In both cases, it would be tax free.

For post office savings accounts, the interest rate is proposed to be enhanced from 3.5% to 4% to bring it in line with the returns on savings bank accounts with banks.

The panel has recommended that these rates may be notified by the government at the start of the financial year based on the average yields on government securities in the previous calendar year.

Along with higher returns, the committee has also recommended the abolition of commission payment to agents on PPF and Senior Citizens' Savings Scheme. The standardized agency commission is proposed to be halved to 0.5% as part of a plan to reduce the overall cost of the small savings fund run by the government.

There is, however, bad news for those investing in Kisan Vikas Patras, as the instrument is proposed to be discontinued.

For those parking funds in National Savings Certificates there is good news as well as bad news. First the bad news, the tenure of the standard product is proposed to be cut from six years to five. The good news is there will be a new product with 10 year maturity with interest rate which is 50 basis points higher than g-sec with a similar maturity. So, the interest rate on offer would be 8.3% based on the 10-year benchmark government bond.

In addition, the committee has also suggested that states be burdened with only half the funds they raise under small savings schemes instead of 80% at present.

While there have been several committees that have looked at restructuring the small savings schemes, the recommendations were rejected as they would have upset popular sentiment. But unlike the previous reports, the present one actually recommends a market-linked interest rate regime, which would be more palatable for the investors as well as the government.

General Secretary
All India Postal Extra Departmental Employees Union