Small Savings set to fetch higher returns

There is finally some good news for individuals in a season of duty hikes and provident fund rate cut. The government is raising interest rate on small savings schemes such asNational Savings Certificate (NSC) and post office deposits by 20-50 basis points.

The new rates will, however, be applicable on investments that you make from April 1 and not on those that you park over the next 10 days to meet your tax saving requirements.

As a result, NSC and public provident fund (PPF), which is a voluntary deposit as opposed to employee provident fund, will earn you 8.8-8.9% instead of 8.6% a year. The shorter tenure deposits, such as term deposits in post offices, are expected to fetch you more than the longer tenure products such as PPF or the 10-year NSC. Savings bank accounts in post offices will, however, not see any change as the 4% return is in line with what most banks pay at present.

The increase in small savings rates, which is expected to be notified by the finance ministry, is in sync with the new policy to link returns on the popular savings instruments with the interest rate on government bonds.

Bank deposits may, however, look more attractive to many as they offer 9% return. But a scheme like PPF, which has a minimum term of 15 years, comes with additional tax sops. Not only is it part of the 80C benefits which entitles tax payers to get a concession of up to Rs 1 lakh a year, but the interest earned on the deposits is also tax-free. So, at the revised rates, the actual return for someone in the 30% tax bracket will work out to 12%.

In addition, the rate of return on small savings schemes that will be notified will be for the full financial year, while bank deposit rates are expected to come down with the Reserve Bank of India widely predicted to begin the rate cut cycle. Even before lending rates come down, banks will start pruning returns on deposits to lower their cost of funds.

The move to raise small savings rates comes barely a fortnight after the Employees Provident Fund Organization (EPFO) slashed the annual return from 9.5% last year to 8.25% for the current financial year based on a decision taken by the finance ministry. In the budget, finance minister Pranab Mukherjee decided to increase the excise duty and service tax rates from 10% to 12% which will put a burden of Rs 35,000 crore on anyone buying a matchbox or a car. He, however, offered some concession by way of an increase in exemption limit for direct tax from Rs 1.8 lakh to Rs 2 lakh.