Interest on Small Saving Schemes - Clarification

Let me wish a Very Happy New Year to all my readers. In my blog on Small Saving Schemes dated Nov 15, I had brought to your notice that the Government had accepted the suggestions of a Committee to link the interest rates on small saving schemes to the market yield. It also said that the Government would announce the rates applicable to various investments on 1st of April every year. Even though the implications were well understood, some people had a doubt whether the interest rates on an existing instrument would be revised every year. The ministry of finance has now given a clarification that the interest on all small saving schemes, except Public Provident Fund (PPF) will remain fixed till its maturity. That means, when the rates are announced on 1st April, it would apply to all the investments made in instruments (other than PPF) during the relevant financial year. New rate, when announced during the next year would apply to subsequent investments only. So, if one invests in NSC on 15th June 2012, the rate announced by government on 1st April 2012 would apply to his investment and the same would remain fixed till its maturity. When the government announces new rates on 1st April 2013, such rate would apply only to those who invest in NSC during 2013-14.

But in case of PPF, this doesn’t work. PPF, unlike many other instruments, is a long term (15 year) deposit on which interest is paid on the outstanding balance every year. So, the interest on PPF account will be revised every year. From the point of view of Interest Rate Risk, it means the yield from all small saving instruments, other than PPF would remain constant, once invested. But when it comes to re-investments or investments planned annually over a period of time for availing tax benefits, one would have to face the fluctuations in interest rates.