Your investments in the small savings scheme

NEW DELHI: Your investments in the small savings scheme -- post office savings scheme, National Savings Certificate, and public provident fund - will soon start earning higher interest rates that are benchmarked to market rates.

The annual
interest rate available on these schemes is at present below what an investor can get from bank deposits of comparable maturity.

The government has announced a complete overhaul of the small savings scheme that has benchmarked rates of interest on these schemes to government securities, introduced a 10-year
national savings certificate (NSC), increased the ceiling for public provident fund deposits to one lakh rupees every year and discontinued the Kisan Vikas Patra.
The new rules will kick in when the government issues a notification.

The decisions are based on the recommendations by a high level expert panel headed by former deputy governor of the
RBI, Shaymla Gopinath.

As per the memorandum issued by the finance ministry, returns on small savings instruments will be linked to government securities of similar maturities, pushing up the current rates on all instruments by 0.2%- 1.3%.

Interest rates on postal savings will go up to 4% from 3.5% at present.

In addition, the
maturity period of monthly investment schemes and national savings certificates will be reduced form six to five years.
The ceiling on annual contributions to the public provident funds will also be raised to 1 lakh from 70,000.

The reforms will address the distortion caused by the small savings schemes in the overall interest rate structure of the economy. Depending on the market rates, these schemes either saw a large inflow of the big outflow, affecting the flows into banks in particular.

When market rates are low, the high interest rates on small savings become a kind of subsidy to the investors.

In the event, as is the case now, when interest rates on these schemes are below the market rates they see a big outflow, affecting the government's fiscal management, as funds from these schemes are used by state governments and the centre.

With bank deposits yielding more than 9% per annum, there has been a net outflow from the small savings schemes, which are administered by the
National Small Savings Fund (NSSF), in the current year.

This has forced the government to increase market borrowings by 52,800 crores over its budgeted fiscal target.

The benchmarking of interest rates on small savings schemes will end this distortion, and also cut the volatility in inflows into these schemes.

To reduce the cost of administration of the scheme, the government has also decided to lower the commission charged by agents that sell these schemes.
As per the memorandum, the payment of agency commission on all schemes, except the Mahila Pradhan Kshetriya Bachat Yojana, will be either discontinued or reduced by at least 0.5%. Women agents will continue to receive 4% 

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