India’s small savings schemes, long cherished for their high interest rates, are under the scanner. The government has announced a strict crackdown on irregular Public Provident Fund (PPF) and Sukanya Samriddhi Account (SS) accounts, stripping them of their attractive 7.1% and 8.2% interest rates. Instead, such accounts will either earn no interest or a reduced 4% Post Office Savings Account (POSA) rate, depending on the violation.
This clampdown affects those who have opened multiple accounts or flouted the rules governing small savings schemes. Here’s what account holders need to know.
Irregular accounts
The government’s decision impacts PPF, SS, and other small savings accounts that were opened in violation of the National Small Savings Scheme rules. While individuals are only allowed one PPF or SS account per PAN, some have managed to open multiple accounts through different banks or by combining a bank and post office.
These additional accounts are now being declared irregular, with interest benefits revoked retrospectively. In essence, what once seemed like a loophole for higher savings is now turning into a costly oversight.
Several other conditions can also invalidate your small savings accounts, including minor PPF accounts opened with an incorrect or unauthorized guardian. Even joint PPF accounts with parents could be affected by these rules.
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Conditions for PPF account irregularities
Multiple accounts: If an individual holds more than one PPF account, all except one will be considered irregular. The holder must designate a primary account, and the balance of any second account will be merged into it. For third and subsequent accounts, no interest will be earned from the date of opening.
It remains unclear whether account holders are permitted to close these accounts prematurely before the 15-year lock-in period and withdraw their capital. “The rules do not mention anything about premature closure of such accounts,” said M. Pattabiraman, founder of Freefincal.
Minor accounts: The situation is more complex for PPF accounts opened for minors. Irregularities occur if:
Both parents open separate accounts for the same child.
Both, a parent and a grandparent open accounts for the same minor.
A child holds both a standalone account and a joint account with a parent.
In all cases, the guardian must designate one account as the primary, and the additional accounts will be deemed irregular.
“In the case of joint as well as standalone accounts for a minor, the standalone account will be deemed an irregular account,” explained Pattabiraman.
Premature closure of these irregular minor accounts is not permitted, and they will earn the POSA interest rate until the minor turns 18, after which the secondary account will merge with the primary one.
NRIs and PPF: A complicated relationship
For non-resident Indians (NRIs), the rules surrounding PPF accounts are particularly strict. Non-residents cannot open new PPF accounts, but if an individual opens one as a resident and later becomes an NRI, they can continue investing until the 15-year maturity period. After this period, however, NRIs cannot extend the account, unlike residents who are allowed to extend their PPF by five years.
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NRIs who have extended their PPF accounts, posing as residents, will have those accounts declared irregular. These accounts will only earn 4% interest from the date of extension to 30 September, after which they will earn no interest. There is no clear guidance on whether premature closure on these irregular accounts of NRIs is allowed or not.
Irregularities in Sukanya Samriddhi Accounts
Sukanya Samriddhi Accounts (SSA), a popular savings scheme for the future education and marriage expenses of girls, is also affected by these new rules.
Guardianship issues: Sukanya Samriddhi accounts opened by grandparents, instead of living parents who are the legal guardians, are considered irregular unless transferred to the parents. Similarly, if both a parent and grandparent have opened accounts for the same child, the latter will be deemed irregular.
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Multiple accounts in one family: The government allows SSA for only two daughters per family. If a third account is opened, even by a relative or grandparent, it will be considered irregular and closed immediately.