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The government on Friday increased interest rates on a range of popular post office saving schemes, a move that will not only make these instruments more rewarding for millions of small investors who depend on them, but also make more cash available to a government running low on funds this year.

While middle class Indians rely on small investment options offered at post offices for social security, the government depends on this pool of money, also called the National Small Savings Fund (NSSF), to part finance its budget.

While post office savings accounts (POSA) will fetch 4% annually, up from 3.5%, the monthly income scheme (MIS) and the public provident fund (PPF) will earn an interest of 8.2% and 8.6% respectively, up from But don't invest just yet - the new rates will be effective from December 1, 2011.

The government, however, decided to discontinue the Kisan Vikas Patra (KVP) and lowered the maturity period for MIS and national savings certificate (NSC) to five years from the existing six years.

It also introduced a new instrument - the 10-year-maturity NSC - offering 8.7%.

The annual investment ceiling in PPF savings has been increased to Rs 1 lakh from the present limit of Rs 70,000, but made loans against PPF costlier, doubling the interest to 2% a year.

The postal department runs small savings schemes that are a major source of borrowings by the government.

These had been losing sheen with the attractive interest rates on offer on bank deposits.

The government had constituted a committee on July 8, 2010, headed by Shyamala Gopinath, then deputy governor of the Reserve Bank of India, for a comprehensive review of government-administered small savings.

"The terms of reference of the committee included review of the existing parameters for the small saving schemes in operation and recommend mechanisms to make them more flexible and market linked," a late evening government notification said.

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