Government may allow early withdrawal of small savings schemes

In what could make small savings schemes like public provident fund (PPF) more attractive for investors, the government may be planning to provide greater flexibility by allowing early withdrawal in case of financial emergencies.

According to a report in The Economic Times, the government's new proposal is part of a bigger revamp that will bring small savings schemes under one umbrella law as proposed in the February 1 budget. This involves putting in place the Government Savings Promotion Act and repealing the Public Provident Fund Act, 1968, the Government Savings Certificate Act, 1959, and the Government Savings Bank Act, 1873.

PPF deposits come with a lock-in period of fifteen years. In 2016, the government allowed premature closure after five years for medical emergency and higher education after paying a penalty of 1 per cent less interest as applicable from time to time. Partial withdrawal is possible under certain circumstances from seventh financial year onward. 

Once implemented, the new structure will make such schemes more attractive to investors. One of the proposed amendments empowers the government to notify norms for early closure of small saving schemes, the report said.

The government can use the enabling provision to provide this facility to investors in the event of medical or financial emergencies. The amended law will also allow guardians to deposit funds on behalf of minors in all schemes, a facility that existed in only some of them. Minors will also be able to nominate an heir. The proposed changes also define the rights of nominees explicitly, it added.

Public Provident Fund (PPF) is one of the most popular tax-saving options. However, PPF interest rates have fallen to a low of close to 40 years, in line with the fall in yields on government bonds to which they have been linked; the rates are revised quarterly. Still, they are far above what banks are offering on fixed deposits. All PPF gains are tax-free.

PPF provides guaranteed return but the interest rate is aligned to yields on government securities with a small mark-up. The rates are subject to revision every quarter. The latest is 7.6 per cent for quarter ended March 31, 2018. For a person in the highest tax bracket of 30.9 per cent, the effective tax rate comes to 10.86 per cent.