TAG: GS 3: ECONOMY
THE CONTEXT: Recently, the Union government announced adjustments in the interest rates for certain small savings schemes for the first quarter of 2024.
EXPLANATION:
- The Sukanya Samriddhi Account Scheme (SSAS) witnessed an increase in returns from 8% to 8.2%, while the interest on 3-year time deposits rose from 7% to 7.1%.
- However, several other small savings schemes, including the widely popular Public Provident Fund (PPF), maintained their existing interest rates.
Continued Freeze on PPF Rates:
- The PPF rate remains static at 7.1%, which has been unchanged since April 2020, marking the sixth consecutive quarter without any alteration.
- Notably, ahead of the last Lok Sabha election in January 2019, there were significant hikes in returns on various schemes, including the PPF which was raised to 7.9%.
- However, this time, the PPF rate has remained constant for yet another quarter.
Stagnant Rates despite RBI Recommendations:
- The Reserve Bank of India (RBI) suggested that the PPF return should have been set at 7.51% for the October to December 2023 quarter, in adherence to the formula-based rates system implemented in 2016.
- Similarly, the rates on 5-year recurring deposit (RD) accounts were expected to increase to 6.91% for the upcoming quarter.
- However, these rates have been kept unchanged at 6.7%.
Factors Influencing Rate Adjustments:
- The interest rates for the next quarter, as per the formula adopted, are linked to government bond yields prevailing between September and November 2023, specifically for securities with corresponding maturities.
- The decision to maintain stability in some small savings schemes’ rates, including the PPF, might be attributed to various economic factors and the government’s strategic approach to managing returns in line with prevailing bond yields.
Impact on Investors and Tax Implications:
- The decision has implications for investors relying on these small savings schemes for stable returns and tax benefits.
- Both the PPF and the SSAS offer tax-free returns, contributing to their popularity among investors seeking tax-efficient savings options.
The Sukanya Samriddhi Account Scheme (SSAS):
- Introduced in 2016, the Sukanya Samriddhi Yojana Account (SSA) is a central government scheme aimed to cater to a girl child.
- The Sukanya Samriddhi Yojana is a government savings scheme created with the intention to benefit girl child under the initiative called “Beti Bachao – Beti Padhao”.
- The parent or guardian of the girl child who is 10 years of age or younger can open an account under this scheme.
- This scheme carries a higher interest rate along with several tax benefits.
Public Provident Fund (PPF) Scheme:
- The PPF Scheme is a very popular long-term savings scheme in India because of its combination of tax savings, returns, and safety.
- The PPF was first offered to the public in the year 1968 by the Finance Ministry’s National Savings Institute.
- It aims to help individuals make small savings and provide returns on the savings.
- It is one of the safest investment products. i.e., the government of India guarantees your investments in the fund
- Tenure: 15 years (Can be renewed in blocks of 5 years).
- Interest rate: Interest rates currently payable on such accounts stand at 7.1%.
- Investment Amount: Minimum Rs.500, Maximum Rs.1.5 lakh p.a.
Conclusion:
- The recent adjustment in interest rates for select small savings schemes, particularly the slight increases in SSAS and 3-year time deposit rates, signifies a nuanced approach by the government towards managing returns in alignment with prevailing economic conditions.
- However, the decision to maintain the PPF rate stagnant for multiple quarters raises questions about the government’s strategy amid evolving economic landscapes and RBI’s recommendations based on formula-driven rates for small savings schemes.
- Investors and individuals availing of these schemes may continue to assess the implications of these rate adjustments on their financial portfolios and future investments.
SOURCE: https://www.thehindu.com/business/Economy/no-pre-poll-small-savings-sops-yet/article67687487.ece
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