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.

Public Provident Fund (PPF) Vs Pension Plans

PPF Vs Pension Plans:

If you are wondering where to invest and its come down to PPF or Pension plan. You are not alone ! There are many Indians who every year ask themselves the same question – should I go with Public Provident Fund (PPF) or invest in Pension Plans.  Maybe this article will help you decide better.


 

What are Pension Plans:

Thinking about the money as a return when you’ll grow old? Yes, then you should explore pension plans for accumulating money and generating a regular income. The profits from investments in pension plans are paid out as regular or standard income after retirement.

National Pension Scheme (NPS):

The National Pension Scheme (NPS) was initiated by Indian Government and it is affected from 1st January, 2004. NPS was prepared to be accessible to all Indian citizens either on voluntary basis or compulsory for central government employees (with the exception of armed forces) who have joined their service on or after 1 January 2004. Anyone who is the citizen of India having the age between 18 and 60 can participate in this scheme.

The NPS scheme is launched in two parts;

Tier – 1 Account – This type account is obligatory for all Govt. sector employees. Under this scheme, Government employees will have to give a contribution of 10% of Basic Pay, DP and DA each month. Then the Government will also give the same contribution on his/her account.

Key points of this account for contribution:

  • Least sum for contribution at the time of account opening -Rs.500/-
  • Smallest sum for per contribution – Rs. 500/-
  • Minimum balance at the end of financial year – Rs. 6000/-
  • Minimum attempt of contributions in a fiscal year – 1.

Tier – 2 Account – In this type of account each individual can open account under this pension scheme. Government won’t do any contribution for this account.

Key points of this Tier 2 account as far as the contribution goes are:

  • Minimum sum at the time of account opening -Rs.1000/-
  • Smallest sum for per contribution – Rs. 250/-
  • Minimum balance at the end of financial year- Rs. 2000/-
  • Minimum number of contributions in a financial year – 1.

Understanding Public Provident Fund:

Public Provident Fund or PPF is known to most Indians as a ‘tax-saving’ saving instrument. It is the most profound exemption for tax. For people who have not a structured pension plan, PPF serves as a retirement income/saving plan for them. PPF is considered to be the reliable plan since the funding scheme is supported all by Government of India. Banks and post offices are the prospective places for an investor. An amount minimum of Rs. 500 and maximum of Rs. 100,000 is required to be deposited in a financial year.


A Brief Comparison between PPF & NPS:

Parameters PPF NPS
Eligibility Anyone who is citizen of India, NRIs are not allowed to open PPF account. Anyone who is citizen of India, NRIs can also open NPS account.
Age Criteria It can be opened in the name of a minor child by the parent or authorized custodian. You must have completed 18 years of age and not more than 60 years.
Limits on Contribution in a Year Minimum: Rs. 500

Maximum: Rs. 1 lakh

Minimum: Rs. 6000

Maximum: No Limit (Subject to underwriting)

Tax Allegation on Contributions All the contribution is tax exempted. The contribution made in NPS is deductible from the total income.
Tax Allegation on Maturity Amount The entire amount is tax exempted. Maturity amount will be liable to deduct according to tax laws. Though, the cumulative deduction is fixed i.e. Rs.1 lakh.
Rate of Returns In PPF, the rate of return is fixed and currently it is 8.6%. Returns from NPS may vary between 10 to 12 %. And there is no assured return and the actual return depends over the market situation.

 

Which is better – a PPF or a Pension Plan?

Most of the pension plans (nationalized or private) offer life coverage schemes as well. They also make available continuing returns where you can gain from the proficiency of companies. The investment value made in pension plans can be directly market-associated and can hence provide higher level of potential returns as compare to investments made in the PPF. Additional, the returning rate of income in case of PPF is not flat and can be easily altered anytime.

Before making any decision for your hard earning money, the plans and policies should be evaluated properly and revised twice with the words. Coming to the real scores, considering the very factual data and putting a high ray of focus on investments, returns, and continuity in coming income at your hand; pension plans are scoring more than ordinary savings such as PPFs. Since it does not assure any guaranteed return also the return amount is not fixed and may get fluctuate at any moment. Especially NPS (National Pension System) is fetching number of investor with all its true profitable outcomes. As an investor, it is always better to make a border line between the real savings and the future plans. The two should not be mixed and properly understood.


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 Accounts – How to open, invest in PPF

Understanding PPF Accounts

PPF account is an acronym for Public Provident Fund Account. It is an enduring debit method from the Government of India on which regular interest is paid. Anyone in India who is citizen of India can open this account in post-office and some allowed branches of banks. The return in this scheme is generally higher than other investments schemes like FD & NSC. The entire maturity amount will be tax exempted under the Income Tax law of India. Many people consider PPF, Fixed Deposits and NSC as possible investment options. We have hence tried to compare PPFs with FDs and National Savings Certificates.

Key Points of a Public Provident Fund Account (PPF Account):

  • Each Indian citizen is eligible for one PPF account only. One can open PPF account only in their own individual name, not a joint name. Though its possible to have a nominee mapped to the PPF account. If the PPF account holder dies and no nominee may be designated, then the total sum will be transferred to his/her authorized successor.
  • The amount you deposit in PPF account is eligible for tax deduction.
  • The amount that one can deposit in PPF can vary between Rs 500 and Rs 1 Lakh every year.
  • PPF Interest Rate: The interest rates on PPF account is declared by Reserve Bank of India (RBI) in the March of every fiscal year. The current interest rate of PPF account is 8.7%. Earlier, the interest rates for PPF accounts were fixed, now they are mapped to the yield on government bonds.
  • The interest calculations for the PPF account is done every month while the interest is compounded annually and credited into the individual’s account at the end of the year. The lowest balance between the 5th and the last day of the month is taken for the purpose of interest calculations. Hence one should always invest on or before the 5th of a month in the PPF account.
  • Tenure of PPF Account: PPF account is having 15 years of tenure. However if account holder wish to extend it then he/she can apply to extend this account for next 5 years more.
  • Loan on PPF Account: Loans can be availed on the PPF account. You can apply for the loan from 3rd financial year and the loan amount must not greater than the 25% of the amount that is in your PPF account.
  • But a new/fresh loan is not permitted if already a previous loan is running.

How to Open a PPF Account:

Any individual can open PPF account by doing some formalities. To open a PPF account in a bank you must have your PAN card number, passport sized photos and one residential proof. By submitting these documents the bank or post-office will provide you your PPF account number and which can be used by you. Earlier the PPF accounts could be opened only at State Bank of India (SBI) branches. Since 2005 this is possible in ICICI Bank branches also.

You can also open PPF account in the name of minor. Either father or mother can open PPF account on behalf of minor child, but both can’t open same account. Grand-parents are not allowed to open PPF account in the name of minor child but in case of death of parents, Grand-parents act as a custodian/guardian and can open the account for minor child.

Non-resident Indians (NRIs) and Hindu Unified Family (HUF) are not permitted to open PPF account.

How to Invest in PPF:

You can simply deposit your money in the bank/post-office where your PPF is by cash/cheque/demand draft. After opening PPF account, you will have a passbook and it will help to keep you updated with how much amount you have in your account. The passbook must be updated for every deposit you made as well as for the interest that will be credited. After each deposit you will get a receipt and it can show as a proof of tax-saving document in your office which will be helpful to reduce the TDS amount from your salary.

Online Investment in PPF: Now some banks allow online transfer to deposit the money in your PPF account. You don’t need to go bank to deposit manually, just add your PPF account as payee/beneficiary for transfer in the bank account for which you have net banking facility and then do directly transfer of the desired amount.

Furthermore if you have your saving account & PPF account in a same bank then you don’t need to add your PPF account as 3rd party beneficiary. You can directly transfer the desired investment amount into the PPF account.

However online transfer facility is not available in post-offices.

How Much to Invest in PPF:

The minimum amount criterion is Rs. 500 in a year and the maximum amount should not be more than Rs. 1 lakh in a year. If any PPF account holder does not deposit minimum amount Rs. 500 in a year then, a penalty of Rs. 50 would be charged beside the arrears of subscription of every Rs. 500 in that year.

You can deposit the desired sum in 12 monthly installments.

Premature Closure of PPF Accounts :

As such the overall amount in a PPF account can be withdrawn only on maturity. But there are provisions in the PPF account to accomodate partial withdrawals in times of emergency or financial pressure for the account holder.These partial withdrawals coming with certain limits e.g. the account holder can withdraw once a year after the age of the PPF account is 7 years or hogher. Also these annual withdrawals should be lower of – 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year.

Premature closure of a PPF account is permissible only in case of death of the account holder.


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 :