Incessant rate cuts and the softer interest rate regime propagated in recent times have had an impact on fixed income instruments across board. Small savings schemes like National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Public Provident Fund (PPF) which have traditionally attracted a substantial number of investments from households and retail investors have not been spared either
Having said that let’s not forget that the returns offered by these schemes coupled with the tax benefits and high safety levels can be matched by few instruments. At a time when the benchmark 6-Yr GOI paper yields 5.53% (at the time of writing this article), NSC offers a return of 8.16% for the same tenure. If the tax benefits were to be factored in, the returns would look even more attractive. A fixed deposit from HDFC, would offer a return of 6.25% over a 6-Yr period. The disparities are stark! Such largesse dished out by the government only adds to the exchequer’s burden. Funds which could have been utilised for productive activities like building roads or bridges are instead diverted to financing payments on small savings schemes. The feasibility of small savings schemes needs to be seriously scrutinised.
What should happen?
Rationalisation in the rates offered by small savings schemes is a must. While the interests of retail investors should be safeguarded, economic viability of these schemes cannot be overlooked. For example a two-tier system could be adopted wherein investor classes like senior citizens, retirees etc. could continue to enjoy the same benefits while a watered-down structure could be made available for other investors. Trimming down the tax incentives offered under Sections 88 and 80L can act as a significant disincentive as well. The Kelkar Committee report, which has been endorsed in principle by the present government, makes similar recommendations.
What is likely to happen?
“Interest of small investors will be protected and they will be given new avenues for safe investment of their savings…” this is what the central government’s common minimum programme has to say. The Congress party (which leads the present coalition at the centre) had stated in its election manifesto that it doesn’t favour any further reduction in small savings schemes, while their partners the Left parties have gone one step further and demanded a hike in small savings schemes. Mr. Kanu Doshi, leading chartered accountant believes “tax benefits on small savings schemes will not be adversely amended. In fact the scope of Section 88 could be widened and made more favourable to the tax payers in lower tax brackets”. It looks like populist measures will once again countermand what economic prudence demands.
Our take - we believe small savings rates and benefits under Section 88 and 80L will be left unchanged i.e. status quo will be maintained.
