The new rates apply to savings certificates purchased from today.

The government claimed the step would encourage more investment in the capital market, deposit in banks and reduce pressure on the annual budget.

In a circular yesterday, the government however withdrew the existing 5 percent income tax at source on the profit of savings certificates.

The interest rates for savings certificates of a five-year term are 7.5 percent in the first year, 8.25 percent in the second, 9 percent in the third, 9.75 percent in the fourth and 11 percent in the fifth year.

Three-year term certificates offer 7 percent interest in the first year, 8 percent in the second and 10.5 percent in the third year.

Five-year certificates now offer 12.5 percent interest and three-year ones 12 percent.

An official of the Sanchaya Paridaptar (directorate of savings certificate) explained the implications of the changes. "If you invest Tk 100 on a five-year certificate, you will now get Tk 55 in profit after five years. And for a three-year certificate, you will get Tk 31.5 in profit after three years," he pointed out.

The Internal Resources Division of the Ministry of Finance also issued another circular yesterday cancelling a part of the Sanchayapatra Rules 1977 that allowed taking bank loans by depositing the savings certificates.

Secretary of the Internal Resources Division Khairuzzaman Chowdhury told The Daily Star, "The new steps have been taken as part of the overall financial reforms. The high rates of interest on savings instruments have been putting pressure on the budget. Besides, by lowering the interest rates, we are encouraging investment in the private sector."

About the small investors, who heavily depend on savings certificates, he said, "They will be affected very little because we have lowered the interest rates by a small proportion."

The IMF dictated that the interest rates on such certificates should be adjusted with the treasury bills. But this has not been in the case of the new rates as it would require accounting skill of the customers to understand it.

"People who will buy the certificates simply need to know what they are buying and what they will gain," said a finance ministry source.

The government has been reducing its savings instruments from 2002 on the donors' advice and closed several savings schemes that year. But the sale of savings certificates continued to rise.

Till August last, the outstanding amount of savings certificates stood at Tk 30,566 crore. The government has to spend about 11 percent of the revenue budget just to pay the interest on the savings certificates.

As savings certificates are very popular among senior citizens, the government intends to create an alternative scheme for them. A pensioner's scheme is being planned for retired officials and employees, sources said.

The government is also considering a policy barring black money holders from buying savings certificates in a bid to legalise their money. To that end, all certificate buyers will be asked to provide their tax identification number (TIN) and photographs.