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Wednesday, February 4, 2015

Government may increase lock-in period for PPF; to offer higher interest rate for 20-year tenure

The government is likely to increase the lock-in period for Public Provident Fund (PPF) by at least two years, reports ET Now.

According to ET Now sources in the Finance Ministry, those who invest in PPF will be able to withdraw after 8 years, as against the current 6-year lock-in period. The government is also likely to increase the tenure of PPF from 15 years to 20 years.

"While it will be up to the saver to opt for either a 15-year or a 20-year saving period, the government will look to lure people with a higher interest rate for the 20-year tenure, under Section 80C," reported ET Now. "This implies that if the saver is willing to invest in PPF for 20 years, the subsequent tax benefit will be higher," the channel said.

According to ET Now, the government is considering this move in order to ensure a stable source of infrastructure funding.

Meanwhile the RBI has said that unbreakable high value fixed deposits will soon earn higher rate of interest. Depositors who place their savings with a bank earn differential rates of interest based on the size of deposit, less than Rs 1 crore and above Rs 1 crore, and the longer the period, the more the interest is. Additionally, deposits up to Rs 1 crore can be withdrawn prematurely, resulting in asset-liability mismatch.

To correct this skew between the interest earned on loans and that paid to depositors, the RBI has allowed banks to offer deposit schemes up to Rs 1 crore, which cannot be broken prematurely, so-called non-callable deposits, but which can attract different rates of interest. This opens the prospect of retail depositors, who opt for such deposits, to earn a slightly better rate of interest than on a deposit which can be broken, or a callable deposit.

At present, all deposits accepted from individuals and a Hindu Undivided Family of up to Rs 1 crore can be withdrawn prematurely, leading to asset-liability mismatches in banks.

The RBI's latest decision is one of the major steps in the direction of interest rate rules linked to deposits, after the central bank allowed banks to offer floating rates on deposits a decade ago. The central bank will issue detailed guidelines soon. Premature withdrawals make banks' asset-liability management difficult.

Source : Economic Times

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