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 meager as tax savings are also subject to ceilings and conditions.

The Banks do offer fixed deposits of varied tenure with interest ranging between 7 to 10 percent and insurance cover from DICGC, a Government organization. However, these deposits are not income tax efficient and post tax returns are lower when compared to other saving products.

Based on the recommendations of Committee for Comprehensive Review of National Small Savings Fund, Central Government had recently issued two notifications on 25^th and 29^th November, 2011 which come into force from December 1, 2011. The new savings regime offer better returns than ever and compared to other investments, offer adequate post tax return and maximum security to the principal amount invested. So if one is willing to invest in fixed income  instruments, better to choose one from Government’s saving plans.

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.

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.

W.e.f. December 1, 2011, Public Provident Fund (PPF) deposits will earn tax free interest @ 8.6 percent per annum while National Saving Certificate (NSC) will also yield interest @ 8.7 percent which also enjoy tax benefits.  With high rate of inflation, though these returns may sound lower but their tax free nature make them a wise choice. Also investors can now invest upto Rupees one lakh per annum in a PPF account.

How the Schemes Compare

 

Option	Period	Return (Pre tax)	Return ( Post tax)
Bank Fixed Deposit	5 years	9.50%	6.50%
Company Deposit	3 years	12.00%	8.40%
NSC*	10 years	8.70 %	7.30%
PPF	10/ 15 years	8.60 %	8.60 %

*Deemed to be reinvested for first 5 years.

Though the company deposits do carry the risk of security but these are considered to be unsecured without any guarantee, it is advisable to choose corporate deposits of only reputed companies or known promoters with proven track record. Of these, PPF is most attractive savings scheme but it requires a 10 or 15 years commitment. It offers liquidity as well as flexibility to the investor in terms of time and amount both. PPF accounts for about 50 percent of small savings. A new 10 year national saving certificate (IX series ) 2011 has been launched w.e.f. 1 December 2011 which will earn an interest of 8.7% per annum compounded semi- annually. On every Rs. 1000, investor will get Rs. 2343.50 after ten years.  One can invest in different denominations from Rs. 100 to Rs. 10000 and there is no upper limit of investment. It can also be pledged as a security.

Thus, for small and risk averse  investors, it would be desirable to invest at this point in time in safe instruments offered by small saving plans which not only provide liquidity, safety and flexibility but also offer tax efficient returns.

 

 

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