Govt cuts interest rate by 0.25% on short-term post office schemes

17 Feb 2016 Evaluate

With a view to bring interest on small savings in line with market rates, the government has slashed interest rate on short-term post office saving deposits by 0.25 percent. This advantage has been withdrawn with effect from April 1, 2016 and henceforth the rates would be revised every quarter and would be decided on the 15th of the preceding month. Besides, the compounding of interest, which is biannual in the case of 10-year National Saving Certificate, 5-year National Saving Certificate and KVP, shall be done on an annual basis from April 1. The Finance Ministry said that small saving interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India. This move would help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes.

Besides, Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme and the Monthly Income Scheme (MIS) which command 0.75 per cent, 1 per cent and 0.25 per cent higher interest rate respectively than G-secs will remain untouched as they are linked to social security goals. Similarly, long-term instruments such as 5-year term deposit and similar tenure National Saving Certificates as well as Public Provident Fund (PPF) have been left unchanged. Currently, PPF deposits get 8.7 per cent interest rate while girl child scheme Sukanya Samriddhi Yojana commands 9.2 per cent. MIS gets 8.4 per cent interest rate.

At present Post office savings of 1, 2 and 3 year term deposits, Kisan Vikas Patra (KVP) as well as 5-year Recurring Deposits till now earned 0.25 per cent higher interest than the Government securities of similar tenures.

The government has also permitted pre-mature closure of PPF accounts in genuine cases, like cases of serious ailment, higher education of children. This shall be permitted with a penalty of 1 per cent reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening.

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