Take Interest. Small savings, big changes

Post office small savings schemes saw big changes in 2016. Key among these was the change in the rate reset mechanism. Early in the year, the government made known its plan to align rates on these schemes with market-linked rates. This was to reduce the wide interest gap that these schemes enjoyed over bank deposits; the latter were ostensibly losing customers as a result.

So, effective April 2016, rates on small savings schemes that earlier were reset on an annual basis began to be reset every quarter — in sync with rate changes on government securities (G-Secs). This resulted in small savings schemes’ rates taking a sharp knock — 0.4 to 1.3 percentage points — in the April to June 2016 quarter. From 8.7 per cent, the rate on the all-time favourite Public Provident Fund (PPF) was cut to 8.1 per cent. The NSC saw its rate being clipped from 8.5 to 8.1 per cent. Rates on all other schemes were also slashed.

But the sharpest cut was made in the post office time deposits of 1-3 years; rates went all the way down from 8.4 per cent to 7.1-7.4 per cent. (See table: Sharp cut). This took away the attractiveness of these post office deposits vis-à-vis bank deposits, in line with the government’s intent. The post office recurring deposit, Kisan Vikas Patra (KVP) and post office monthly income scheme (POMIS) also lost their sheen, after the deep cuts.

But other schemes such as PPF, Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Scheme, National Savings Certificate (NSC) and the 5-year term deposit still remained attractive, as they offered better rates than comparable options such as bank deposits. The tax break under Section 80C adds to the advantage of these products which are as safe as they get since they are guaranteed by the government.

With interest rates in the economy and G-Sec yields continuing to moderate, rates on small savings schemes should have seen further cuts in the July to September 2016 reset. Thankfully, the government did not wield the scissor then.

Also, during the next reset applicable from October to December 2016, rates were cut by just 0.1 percentage point across the small savings schemes, far lesser than the dip in G-Sec rates.

This is good news for investors, but carries the risk of much sharper cuts when rates will soon be reset for the January to March 2017, quarter. As it is, G-Sec rates have come down sharply with the significant cash infusion in banks due to the demonetisation exercise. So, the possibility of small savings schemes taking big cuts soon is high. But there is a window of opportunity until December 31 to put money in those small savings schemes in which the rate at the time of investment stays till maturity. In these fixed rate products, new rates announced each quarter apply only to investments made in the quarter and hold till their maturity.

This category comprises the NSC, SCSS, KVP, POMIS and post office time and recurring deposits. If you invest in these schemes before this month end, you can lock into their prevalent healthy rates. On the other hand, the PPF and Sukanya Samriddhi Scheme are variable rate products in which the rates keep changing throughout the tenure — that is, the new rates announced each quarter will apply to the entire accumulated corpus on these products. So, it makes little sense rushing to put money now in these products.

Besides the rate reset change, the Sukanya Samriddhi Scheme for the girl child also saw quite a few tweaks this year. Deposits can now be made in the scheme each year for 15 years from the date of account opening; earlier, it was 14 years.

Also, deposits made until the 10th of each month will now be eligible for interest for that month; earlier, the cut-off date was the 5th of each month. The changes also clarify that the account can be opened in the name of adopted girl children too, aged less than 10 years. Also, the girl child can now make deposits, if she has crossed the age of 10. Earlier, only the guardian was allowed.

Besides, unlike earlier, when partial withdrawal (up to 50 per cent of prior year balance) was not allowed until the child turned 18, now withdrawal for higher education is allowed if the girl has turned 18 or has passed 10th standard, whichever is earlier. Now, unlike earlier, the account is not considered closed when the girl gets married after she is 18 years of age; this is now at the request of the account holder.

Not-so-nice changes in the scheme include the rule that all the deposits in an account under default, including those made prior to the default date, will earn only the post office savings bank interest rate. An account is considered to be in default if the minimum amount of ₹1,000 is not deposited each year. Also, if the girl child becomes a non-citizen or non-resident of India, the account will be prematurely closed, interest stopped from the time of change in status and the balance in the account returned. Next, partial withdrawal (up to 50 per cent of prior year balance) for marriage, earlier allowed, is not there under the new rules.

Rule changes now let you close the PPF account after completing five financial years from the account opening. Such closure is allowed for medical expenditure or higher education purpose.

But the premature closure comes at a cost; the interest will be 1 percentage point lower than that you would have got otherwise.