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In a bonanza to millions of small savers, the government today increased interest rates on deposit schemes offered by post offices, like savings account, Monthly Income Scheme and Public Provident Fund.

While post office savings accounts (POSA) will fetch 4 per cent interest, up from 3.5 per cent, the Monthly Income Scheme (MIS) and the Public Provident Fund (PPF) will earn an interest of 8.2 per cent and 8.6 per cent respectively, a government release said.

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The maximum increase is in the one-year fixed deposits-- from 6.25 per cent to 7.7 per cent. The interest rate on other time maturities has been hiked as well.

The new rates will be applicable from the date of notification which will be announced soon.

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The decision to hike interest rates, which is in line with the recommendations of Shyamala Gopinath Committee, will make small savings schemes more attractive and returns would be in sync with market rates.

The government, however, decided to discontinue the Kisan Vikas Patras (KVPs) and lowered the maturity period for MIS and NSCs to five years from existing six years.

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It also introduced the National Savings Scheme (NSC) with 10-year maturity.

The annual investment ceiling in PPF savings has been increased to Rs 1 lakh from the present limit of Rs 70,000, but it would be costlier to obtain loans from the savings under as lending rate has been doubled to two per cent.

The government has scraped five per cent bonus on MIS and has also done away with commission for agents on PPF and Senior Citizens Savings Schemes.

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The Finance Ministry also said the payment of commission on PPF schemes and senior citizens savings scheme will be discontinued and the agency commission under all other schemes (except Mahila Pradhan Kshetriya Bachat Yojana (MPKBY) agents will be halved to 0.5 per cent.

According to the Gopinath Committee, the agents were paid around Rs 2,400 crore commission in 2010-11.

Incentives, if any, paid by the state/UT governments will be reduced from the commission paid by the central government, it added.

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In line with Gopinath Committee's suggestions, the government also decided to align rate of interest on small savings schemes with G-Sec rates of similar maturity, with a spread of 25 basis points (bps) with two exceptions.

"The interest rates for every financial year will be notified before 1st April of that year," it said.

It further said the minimum share of states in net small savings collections in a year for investment in state government securities will be reduced from 80 per cent to 50 per cent.

The remaining amount will be invested in central government securities or lent to other willing states or in securities issued by infrastructure companies/agencies, wholly owned by central government, it added.

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On the operational issues of NSSF, the government has also decided to set up a monitoring group consisting of officials from Ministry of Finance, RBI, Department of Posts, SBI, other select banks and some state governments.

The panel will resolve various operational issues like reducing the time lag between collection and investment.

An earlier government panel had noted that Kisan Vikas Patras (KVPs) and NSC instruments are quite expensive in terms of the effective cost to the government and should be discontinued.

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The Gopinath Committee was however of the view that while KVP may be discontinued as it is prone to misuse being a bearer-like instrument, NSC could continue with modifications.

Following recommendations of the 13th Finance Commission, the Committee was set up in July 2008 to review of the existing parameters for the small saving schemes in operation and recommend mechanisms to make them more flexible and market linked.

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The Committee submitted its report to the government on June 7, 2011.

In September, the government had increase its market borrowings by Rs 52,800 crore to Rs 4.7 lakh crore in 2011-12, because of dip in small savings collection.

Small saving collections are loosing sheen as banks are offering higher interest rates.

Budget 2011-12 calculations were made with estimation of Rs 24,000 crore in NSSF, but instead the fund dipped by Rs 35,000 crore.