Financial Daily from THE HINDU group of publications
Saturday, Mar 01, 2003
Industry & Economy - Small Savings
Small savings: Remain beneficial for common man
THE continuance of tax incentives for small saving schemes and a relatively attractive interest rate, despite the 1 percentage point decrease, is expected to cheer investors.
The final report on direct taxes authored by Dr Kelkar dubbed the high interest rates and tax incentives on small savings as "micro-rational" for the individual and "macro-irrational" for the economy. The Finance Minister has allowed the continuance of this macro-irrationality.
Tax rebates on these schemes have not been discontinued. Deduction under section 80-L also continues. This is a big positive for investors in such schemes even though coupon rates on all schemes have been reduced by one-percentage point. Despite the reduction, the post-tax yields on these schemes are still attractive.
In addition, since the tax incentive for investment plans of insurance companies have been removed, relative attractiveness of schemes such as NSC, NSS and PPF have only increased.
In the case of the post-office monthly income scheme - - a six-year scheme - - the yield has declined to around 9.7 per cent. However, this is in striking contrast to the yield of 6.3 per cent on a government security of similar maturity. Throw in deduction under section 80-L, the post-tax yield will be quite attractive compared to other investment options. The yields on Kisan Vikas Patra, which is the most popular small savings scheme among investors, at 8.5 per cent is higher than that of similar bonds offered by ICICI and IDBI.
In the case of NSC, the yield at 12.36 per cent compares well with the yield of 10.10 offered by five-year ICICI Tax Savings Bonds. In addition, the yield on ICICI Savings Bonds may decline further in the days ahead.
In the case of Public Provident Fund, the yield declines to 9.2 per cent after tax.
However, what should be of concern to employees in the private sector is the differential in yields between Employees Provident Fund and PPF. In 2002, the Central Board of Trustees of EPF had steadfastly refused to bring down the coupon rate from 9.5 per cent to 9 per cent. If the Trustees reiterate their opposition to reduction this year also, then voluntary contributions to EPF may yield a higher return than contributions to PPF. As such, contributions to EPF may be favoured ahead of PPF this year.
Interestingly, the mode of computation of the interest rates on small savings has still not been made public. In February 2002, the then Finance Minister, Yashwant Sinha, said the rates are now benchmarked to the yields on government securities. He also made it a point to indicate the rates were no longer administered.
However, the present Finance Minister continues to refer to these rates as "administered". In fact, if the coupon rate on these schemes were linked to yields on government securities, the reduction in coupon rates would have been much higher.
In his report, Dr Kelkar had referred to small savings schemes as the SLR (Statutory Liquidity Ratio which requires Banks to invest in Government securities) for individuals. It can only be said that the stage is set for continued patronage of the small savings schemes by investors - - at least in the year 2003-04. Happily for at least now, common man's SLR continues.
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