Small savings schemes, especially those with a maturity of less than five years, will give lower returns from April 1, 2016. The Finance Ministry on Tuesday announced a new interest rate regime for such schemes that will be aligned to the yield on government securities.

The return on short-term small savings schemes has been cut by 25 basis points.

“The 25 basis point spread that one-year, two-year, and three-year term deposits, and Kisan Vikas Patras as well as five-year Recurring Deposits have over comparable tenure government securities, shall stand removed from April 1, 2016 to make them closer in interest rates to the similar instruments of the banking sector,” said a Finance Ministry statement.

At present, these schemes offer interest rates of 8.4 per cent while the 364 day T-Bill has a yield of 7.27 per cent and the 10-year government security (2025) has a yield of 7.92 per cent.

However, in the case of long-term small saving products such as the five-year Term Deposit and National Saving Certificates and PPF, the Finance Ministry has decided to retain the spread of 25 basis points over government securities. At present, they offer a return of 8.4 per cent to 8.8 per cent.

Similarly, the interest rate for Sukanya Samriddhi Yojana (9.2 per cent), the Senior Citizen Savings Scheme (9.3 per cent) and the Monthly Income Scheme (8.4 per cent) has been left untouched. These will also enjoy the existing spread over the government security of comparable maturity – of 75 bps, 100 bps and 25 bps respectively. “These are savings schemes based on laudable social development or social security goals,” said the Finance Ministry, adding that even on the spread over government paper for long-term securities has been “left untouched as these schemes are particularly relevant to the self-employed professional and salaried classes. This will encourage long term savings.”

The objective is to help banks lower deposit rates and eventually lower lending rates in line with the Reserve Bank of India’s monetary policy. Small savings schemes are preferred over fixed deposits due to their high returns.

Interest rates will now on be recalibrated from April 1, 2016 on a quarterly basis. Premature closure of PPF accounts of over five years maturity will also be permitted in cases of serious ailment, higher education of children but with a penalty of one per cent cut in the interest.

Under the new norms, the biannual compounding of interest for 10-year and five-year NSC and KVP will be done on an annual basis.

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