Moving quickly to contain public outrage ahead of key state polls, Union Finance Minister Nirmala Sitharaman on Thursday Morning announced that the move by her ministry on March 31 late evening to slash rates of small savings schemes was an “oversight” and the previous rates will continue for April-June quarter.
“Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn. @FinMinIndia @PIB_India,” Sitharaman said in her Twitter handle.
The rate cut announcement and then the hurried recall is unique.
On March 31 late evening, the Finance Ministry had announced the lowering of interest rates on various small saving schemes such as National Saving Certificates (NSC) and Public Provident Fund (PPF) between 40 basis points and 110 basis points. The pay-out on PPF has now come down to a multi-decade low of 6.4 per cent. This would have hit fixed income investors, especially those in senior citizens group.
The new rates were said to come into effect from April 1 i.e. be valid till June 30. Contributions made on or after April 1 would have fetched a lower rate, while those made till March 31 would have got old rates. The small savings schemes basket comprises 12 instruments, including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Scheme. If the latest round of cuts held, interest rates on small savings schemes have been reduced by a full 110-250 basis points in financial year 2020-21.
As per the Finance Ministry announcement on March 31, with effect from April 1, 2021, Public Provident Fund (PPF) will fetch 6.4 per cent down from 7.1 per cent earlier, National Savings Certificate (NSC) will get you 5.9 per cent, down from 6.8 per cent earlier, Sukanya Samriddhi Yojana (SSY) will give you 6.9 per cent, down from 7.6 per cent earlier. Post office time deposit rates across tenures have been reduced and will earn between 4.4 per cent and 5.8 per cent compared to earlier range of 5.5 per cent to 6.7 per cent. Senior Citizen Savings Scheme will fetch 6.5 per cent, down from 7.4 per cent previously. Kisan Vikas Patra will fetch 6.2 per cent, down from 6.9 per cent earlier. Savings deposit rate will be 3.5 per cent, from 4 per cent earlier.
The government can revise the interest rate at the beginning of every quarter. Since 2016, interest-rate resetting has been done based on yields of government securities of the corresponding maturity, with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee.
This was the second time the government had cut interest rates on small savings schemes in the past twelve months. In the April-June quarter of 2020-21, the government had slashed rates of small savings schemes by 70-140 basis points. 100 basis points/bps is equal to 1 per cent.
Tag: Public Provident Fund
Investments that provide tax-free income
When you make investments, you might get income from those investments which could include interest income. Most of the time the income from investments is taxable. However, there are some traditional investments that provide tax free income. Here are the ones you can consider.
Sukanya Samriddhi Account
This scheme is good for those who have a girl child at home. This is among the best tax-free investments in India. The advantage for investors is that the interest rate is 7.6 per cent. This is better than most fixed income investments in the country including bank deposits. The second advantage with the Sukanya Samriddhi investment is that it offers tax free interest income to all investors.
The third advantage is that investments of up to Rs 1.5 lakhs will qualify for tax exemption under Sec 80C of the Income Tax Act. You can invest in the names of up to two girl children. The minimum deposit for the investment is only Rs. 250. The deposit will be for 21 years from the date of opening the account. You can set up auto debit for the investment. Once your child is 18 years of age, you can withdraw 50% of the balance in the account as the previous financial year. This should be for either education or marriage of the child.
Public Provident Fund (PPF)
There are a number of reasons why you should invest in the PPF. The first and the foremost advantage of investing in PPF is the sovereign guarantee. The second advantage is that the interest rate for the investment is a good 7.1%. Note that now, all small savings schemes offered by the Department of Posts are linked to government securities. Since government securities are traded every day, their prices keep changing constantly. However, since savings scheme interest rates cannot be volatile, the interest rates for the investments are reset every quarter.
There is no other investment that is backed by the government that gives you more interest than the PPF at the moment. The third advantage is that you can get tax benefits for the investment under Sec 80C. You can start a PPF account with a bank or post office. The interest is tax free and is paid every year. You only need Rs. 100 to start a PPF account.
Employee Provident Fund (EPF)
EPF enjoys the Exempt-Exempt-Exempt (EEE) status. The interest amount from your EPF account will be tax-free. You can claim tax deductions under Section 80C for the amount invested. You can also make voluntary contributions over and above the amount contributed by you and your employer. You could invest up to 100% of your basic salary and the dearness allowance. All contributions that you make will earn interest. If you don’t have a job, you can withdraw from EPF.
Tax Free bonds
Tax free bonds from various companies offer you a good interest rate. The interest from these bonds is totally tax free. These tax-free bonds are traded on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). There is no Tax Deducted at Source (TDS) for the bonds. You can purchase the bonds using your demat account.
Deposits
For a resident individual who is 60 years or less or a Hindu Undivided Family (HUF), interest earned up to Rs. 10,000 in a financial year is exempt from tax. This is allowed as a deduction from income and is for interest income earned from:
- Bank savings account
- Savings account with a co-operative bank or
- Savings account with a post office
Note that senior citizens are not entitled to benefits under section 80TTA.
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