Quarterly reset of interest rates for small savings schemes

The government is exploring the possibility of a quarterly reset of interest rates on small saving schemes like NSC, PPF, Kisan Vikas Patrikas to bridge the gap between bank deposits including Fixed deposits and these small saving instruments.

Currently most banks offer an interest rate which is much lower than those offered by the small savings schemes. This seems to have been quoted as one of the significant reasons for slower mobilization of deposits by banks. Consumers find it more attractive to park their money in NSCs and PPFs.

On the other hand, banking industry needs to generate deposits at a healthy pace to stay viable. Given the more lucrative option from these instruments, banks are also forced to capture deposits at a higher rate. Which in turn means that the loans that the banks extend to its consumers, would also happen at a higher rate. One can safely assume that this move will result in loan rates coming down gradually. In the short term it should have a positive impact on the volume of deposits raised by banks, their operating cost of raising these deposits and also the overall margin from the business. As and when the banks start to pass on the benefits to the customers the loan rates and hence the volumes should also come down.

The other motive which is driving the government to undertake these quarterly revisions in rates could be the need to bring the interest rates on NSCs, PPFs and KVPs closer to the market rates. Thereby reducing the current distortions in the market.

A quarterly reset option would allow the rates to come closer to the market and stay closer.

PPF Vs FD Vs NSC – How to choose

Update: Government is planning to allow a quarterly reset of interest rates on PPFs and NSCs. If this gets implemented, the rate-difference between PPF, NSCs and Fixed deposits will shrink.

 

This article is part of our series on helping consumers understand the common investment/savings instruments available outside of stock markets. The series consists of :

PPF Vs Fixed Deposit Vs NSC


Before we head out to discuss PPF Vs FD Vs NSC and help choose between Public Provident Fund, Fixed Deposits and National Savings, lets spend some time to get a clear understanding of all these three investment options available to Indian Residents – NSC, PPF and FDs.

Why a comparison between PPF, Fixed Desposits and NSC is needed?

Most middle class tax payers, look at options that can help them earn money and also probably save a bit on the income tax front. Public Provident Funds have been promoted by the central government and hence have signifcant awareness amongst Indians. Fixed Deposits also have been around as a safe investment instrument, promoted by the banking industry. Given that the fixed deposit rates keep on varying, their attractiveness keeps on changing.


Public Provident Fund (PPF)

Public Provident Fund (PPF) is held by the government and is usually secure with relatively high returns. The minimum investment limit in PPF is Rs. 500 and the maximum is up to Rs.1,00,000per annum. At the present time PPF is compounded at a yearly interest of 8.7%. The scheme is for 15 years.

Benefits of Public Provident Fund (PPF):

  • The depositor receives the rebate on his asset under section 80C of I.T. Act 1961.
  • Interest earned on PPF and the absolute sum is measured as tax free.
  • If you want to invest small amount of money then you can do it every year for a long period.
  • Balance total held in PPF account is also tax free from wealth tax.

Interested in PPFs? learn more about PPF a/cs and how to open a PPF Account. (you can now have an online PPF account also)


Fixed Deposits(FDs)

In a fixed deposit saving scheme, an exact sum of money is invested in the bank for an assured phase of time by assigning a fixed rate of Interest. The minimum limit of investment in most of the banks is Rs. 100. Currently, the interest rate in most of the banks is between 8%-10%.

Benefits of Fixed Deposits:

  • The saving in fixed deposit schemes is tax free under section 80L but only till a limit of Rs. 12,000.
  • The deposited amount will be safe as it is indemnified under the Deposit Insurance & Credit Guarantee Scheme of India.
  • The depositor can avail for loans up to 75%-95% of the invested sum.
  • Fixed deposits are greatest choice to go for if you want to spend your money for an extensive phase of time in addition to being paid a high returns.

National Savings Certificate (NSC)

National Saving Certificate (NSC) is a post office savings scheme. Similar to PPF, NSC is also held by the government and is one of the best available safe investment options. One important thing of NSC is that there is no maximum limit on investment; though, the minimum limit of investment is Rs. 500.

The rate of interest on deposited sum is compounded on 8.6% for 5 years lock-in period and 8.9% for 10 years lock-in period twice a year.

Benefits of National Savings Certificate (NSC):

  • The depositor receives tax exemption on initial 5 years under section 80C of Income Tax Act.
  • You can also apply to avail loans from banks over this certificate.

PPF Vs FD Vs NSC:

Parameters PPF NSC FD
Maturity Period 15 years 5 & 10 Years 5 Years
Interest Rate 8.7% 8.6%  & 8.9% 8 to 10%
Tax on Maturity Tax Free Taxable Taxable
Premature withdrawal facility Yes, from 5th year Onwards No No
Loan Facility Yes Yes Yes

Final Take Away:

To invest in PPF would give way enhanced returns in comparison to NSC & FD. The single disadvantage of PPF is the lock-in Period and i.e. 15 years. If you don’t need your money before 5 years then certainly PPF is the best choice among these 3 available saving plans in India.