| Nov. 11: Small savers and taxpayers have something to cheer about and tax dodgers something to fret about. The government has raised the rates of interest on small savings schemes and given taxpayers a little more headroom by raising the investment ceiling on the popular public provident fund (PPF) from Rs 70,000 to Rs 1 lakh. The interest rate increases on the small savings instruments were generally higher than those recommended by a committee headed by RBI deputy governor Shyamala Gopinath, which submitted its report in early June after a comprehensive review of the national small savings fund (NSSF). The interest rate on the post office savings accounts was raised to 4 per cent from 3.5 per cent. But it is difficult to say whether the small savers will be greatly enthused about the rate hike especially after the RBI recently deregulated savings bank rates, prompting several private banks to woo customers with the offer of as much as 6 per cent. The new small savings rates will come into effect from dates that will be spelt out in a separate notification. "The interest rate for every financial year will be notified before April 1 of that year," said a notification issued today. The big change is that the government has accepted the committee's recommendation to scrap the Kisan Vikas Patra (KVP) — a popular cash certificate which currently doubles investment in eight years and seven months. The committee had said that the KVP was a bearer-like certificate with a regulated premature closure facility and was open to abuse by tax dodgers. They can be bought or sold without going to the post offices. The KVP accounted for 25.58 per cent of the total outstanding of Rs 619,908 crore under all small savings schemes at the end of March 2011. Once the scheme is wound up, black money operators who have used the KVP route for years will have to look for another place to hide their loot. The maximum investment in post office savings bank account has been kept unchanged at Rs 1 lakh for individual accounts and Rs 2 lakh for a joint account. The PPF account holders will be pleased to learn that they will now earn a rate of interest of 8.6 per cent against 8 per cent at present. However, there is a flip side: if they opt to take a loan from the PPF account, they will have to pay a higher rate of 2 per cent against 1 per cent at present. The National Savings Certificate (NSC) — a preferred tax-saving instrument — will now be offered in two maturity brackets of five and 10 years. The 5-year NSC will carry a rate of interest of 8.4 per cent against 8 per cent at present. The 10-year NSC will offer 8.7 per cent. The NSC, however, isn't expected to qualify as a tax-saving instrument after April next year when the government is due to implement the direct tax code that awaits parliamentary approval. The maturity period on the evergreen post office monthly income scheme has been reduced to five years from six at present with the interest rate to be realigned to the five-year government security (G-Sec). It will pay 0.25 percentage point more than the yield on the five-year G-Sec. MIS account holders will, however, no longer get the 5 per cent bonus on maturity. The rate of interest on most small savings schemes will be linked to the government securities of similar maturity and usually offer 0.25 per cent more than the yield on the G-Sec. There are, however, two exceptions: the 10-year NSC will offer half a percentage point above the G-Sec yield. The senior citizens' savings scheme will offer 1 percentage point more than the 15-year G-Sec. The investment ceiling of Rs 15 lakh on the senior citizens' savings scheme hasn't been changed. Interestingly, the government has decided to slap a penalty for premature withdrawal from post office fixed deposits. Until now, one could withdraw a post office fixed deposit without any penalty after the expiry of six months from opening the account. Now, on premature withdrawal a year after opening the account, the applicable interest rate will be one percentage point less than the interest rate payable on fixed deposits of a similar maturity. If the fixed deposit is withdrawn before 12 months from opening the account, the depositor will get only 4 per cent interest. The government has also changed the agency commission for small savings schemes. Agents selling post office small savings schemes will no longer earn any commission on selling PPF and senior citizen savings schemes (SCSS). For all other schemes, the agency commission has been reduced to 0.50 per cent from 1 per cent. The rationalisation of the small savings schemes became necessary because the asset-liability mismatch had reached an alarming level of Rs 36,932.38 crore, according to the report prepared by the review committee. Because of the loss on the income and expenditure account, there has been an excess of liabilities compared to assets built over the years, the report said. "If the asset-liability mismatch is allowed to continue, it will create an unsustainable fiscal burden on the government," said Ficci secretary general Rajiv Kumar, a member of the committee. | 
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