SAVINGS DEPOSITS TO FETCH MORE.

[Dr. Sanjiv Agarwal]

In a bid to follow the market and try to fall in line with the trend of hike in interest rates all across the board, the government was left with no choice but to increase the rate of interest on various saving deposit schemes of the government.

With the trend of increase in bank rates, both deposits and advances continue unabated and the rates of bank deposits have been on a rise. The returns on various other investments, be it bullion or real estate or stocks - all have also risen in recent past. However, government sponsored savings schemes continue to earn same returns since last many years and there had been no change due to external factors – be it market rate or the prevailing inflation. The result was that inflation adjusted earnings used to be meagre as tax savings are also subject to ceilings and conditions.

Highlights of Savings reforms

• Introduction of a 10-year National Savings Certificate (NSC) scheme.
• Increase in the ceiling on annual contributions to the Public Provident Fund (PPF) deposits from the current Rs. 70,000 to Rs. one lakh p.a.
• Discontinuation of the "Kisan Vikas Patra" scheme
• Interest rates on Postal savings deposits to go up by 0.50% to 4% from existing 3.5% .
• The maturity period of Monthly Investment Schemes (MIS) and National Savings Certificates (NSC) to be reduced from six years to five years.
• In a bid to reduce the cost of administration of the scheme, commission paid to agents to be lowered .
• No commission on PPF and senior citizen schemes to agents
• Women agents encouraged.

The government has announced the twin bonanza for small savers – one by hiking the interest rates across the board and two by making investments in government schemes more lucrative so as to check diversion of savings into other non government schemes.

According to the new scheme of things released recently, interest on post office savings bank deposits has been hiked from 3.5 % to 4% ;  interest on monthly income schemes is up form 8% to 8.2% but there will be no 5% bonus on maturity on MIS scheme and interest on one year fixed deposit schemes is up from 6.25% to 7.7%. The rate of interest on other post office deposit schemes has also been raised. Still, there continues to be a gap when compared to bank deposits. Recently, Reserve Bank of India freed the saving bank interest rates and many banks have hiked their saving deposit rates.

Another major development is in rate hike of most popular scheme, Public Provident Fund (PPF) from 8% to 8.6% (tax free). To make the schemes attractive, national savings certificate’s tenure has been reduced from 6 years to 5 years and investment ceiling in PPF has been raised to Rs. one lakh (existing Rs. 70000 year) in a PPF account. A new national saving certificate scheme is also being launched with a longer 10 year maturity.

New Interest Regime
Post office savings	4%
Public provident fund	8.6.%
Post office monthly income scheme	8.2%
Post office 5 year RD scheme	8%
Post office fixed deposits (1year)	7.7%
New 10 year NSCs	8.7%

The government has on one hand increased the deposit rates but has also tried to match the increased cost of deposit from this source only. The lending rate against such deposits has been doubled from 1% to 2%. The 5% maturity bonus on monthly income scheme has been done away with and commission on PPF and senior citizen schemes has been abolished, discouraging the agents. This may, however, impact the savings mobilization as a majority of deposits come through agents.

Deposits such a post office deposits, public provident fund, National saving certificate etc. enjoy fax benefits as well. The deposits are allowed a deduction of upto rupees one lakh from their gross total income under section 80C of the Income Tax Act, 1961. Thus in such deposits, investors get incomes which are tax exempt as well as investment is tax deductible. In fact, PPF is also exempt on maturity.

Under the new scheme, the investment ceiling in PPF has been enhanced from Rs. 70,000 p.a. to Rs. one lakh p.a. While it may have a favourable impact in attracting new investors, it may not affect existing base as there is already a commitment to investments and in inflation hit scenario, and investors would be just able to fulfill their Rs. one lakh threshold limit under income tax. Other committed investments include contribution to PF, ULIPs, insurance premises, post office deposits, home loan EMI etc. for the purpose of tax planning.

These investments will fetch a better return but however, only after a notification is issued to this effect in future.

 

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