A government committee has suggested raising interest rates on Post Office savings bank deposits to 4%, a suggestion that could benefit lakhs of small depositors.
The Committee on Small Savings also recommended linking returns on other small savings schemes with interest rates on government securities.
It has also suggested that Kisan Vikas Patra (KVP) be withdrawn and annual investment limit for the popular Public Provident Fund (PPF) be raised to Rs 1 lakh from Rs 70,000 at present.
The committee recommended that interest rates for Post Office savings deposits be raised to four per cent from 3.5% at present, in line with the Reserve Bank”s decision to hike rates on savings bank deposits.
Under the new formula, suggested by the committee headed by RBI Deputy Governor Shyamala Gopinath, small savings schemes would provide better returns to investors.
Interest rate for one-year deposit scheme would go up to 6.8% from 6.25%, while returns for the PPF would improve to 8.2% from 8%. With regard to taxing returns on the small savings schemes, the committee said the issue should be considered by the government while firming up the Direct Taxes Code (DTC), which seeks to replace the Income Tax Act, 1961.
Noting that the small savings schemes are agent-driven, the committee suggested that the commission on them should be gradually reduced from 4% to 1%.
While recommending to raise the interest rate on savings deposits by 50 basis points to 4 per cent, the Committee said the government should introduce the system of calculation of interest rate on a daily basis on post-office schemes as is being done by banks. It further suggested that the interest rates on various small saving instruments be benchmarked to the secondary market yields on Central Government securities of comparable maturities.
Taking a cue from Reddy and Rakesh Mohan committees, it said the administered interest rates on the schemes should neither be raised nor reduced by more than 100 basis points above or below the benchmark rate. It recommended a positive spread of 25 basis points over the rates of government securities of similar maturities. The new rates should be notified by the government every year from April 1, 2012.
To prevent money laundering and generation of black money, the Committee recommended strict enforcement of the Know Your Customer (KYC) norms.
On investment ceilings for different small savings schemes, it said that the Government should retain them. In case of removal of ceilings, the Government may consider taxing the accruals on the schemes.
To improve the liquidity of the 5-year recurring deposit scheme, it said that the government may reduce the lock-in period to one year from three years with a penalty for premature withdrawal. The penalty could be one per cent less interest rate.