Friday, June 10, 2011

National Savings Scheme Fund review to help you save more

Dear Comrades,

Soon, you may be able to save more through the Public Provident Fund (PPF). A review committee under Reserve Bank of India deputy governor Shyamal Gopinath on the National Small Savings Fund (NSSF) has proposed an increase on the maximum you can invest in PPF from the existing Rs 70,000 to Rs 1 lakh, in line with the Section 80C limit for Employee Provident Fund.

Experts say the government could garner more funds if the move is implemented. “This is a very good move, as PPF is completely exempt from tax. Many people invest larger chunks of money in PPF for their retirement and this forms the maximum for saving taxes,” says Kartik Jhaveri of Transcend Consultants.

•You can invest more in PPF as the investment limit may be raised to Rs 1 lakh
•Returns from small saving instruments of the same tenure will be market linked
•You stand to earn 25 basis points more than the related market instrument
•Withdrawals from PPF would mean losing two per cent compared to the prevailing rate
•KVP may be replaced by 10-year NSC
•Returns from senior citizens scheme and NSC would be unchanged

Most importantly, if the committee’s recommendations are implemented, returns from these instruments will be market linked to 10-year government securities (G-secs) of similar maturity with a positive spread of 25 basis points. That implies if the 10-year G-sec is trading at 7.98 (as on April 1), investors could expect around 8.25 per cent from PPF. Returns from National Savings Certificates and other instruments will also improve.

The revised rates may be notified by the government afresh at the beginning of every financial year based on the average yields on government securities in the previous calendar year.

While the committee offers a carrot of raising the limit, there is a stick if someone wants to withdraw money prematurely. The committee has recommended a cut of two per cent on withdrawing from the deposits as compared to the prevailing rate.

There are many more changes recommended for small saving schemes. Kisan Vikas Patra (KVP) may be removed from NSSF. “This is in the interest of investors, as this scheme did not give tax benefits. And, though it could double investors’ money, they had to wait for over eight years for the same,” says D Sundarajan of Trendy Investments.

Keeping in mind the need for long-term investment products, the committee has asked for the introduction of National Saving Certificates (NSCs) of 10 years. The existing NSC has a lock-in of six years, which may be brought down to five years. But, this may not mean much for you as there is no revision in returns and the interest earned is taxable.

The committee has recommended a rise of 50 basis points in returns from the postal saving scheme i.e. four per cent as against 3.5 per cent now, in line with the bank savings account. But, there would be two exceptions in the form of Senior Citizens Scheme and National Saving Certificate (NSC), where the rates are unchanged at nine per cent and eight per cent, respectively.

In comparison, the State Bank of India’s (SBI ) one-year term deposit is offering 7.75 per cent. And the amount invested is not exempted from tax. At the same time, the tax-saving five-year bank deposit from SBI is fetching 8.25 per cent. Sundarajan says, “We have been advising clients who fall in the 10 per cent tax bracket to stop investments in even PPF and lock-in longer-term fixed deposits earning 10 per cent and more. However, for those in the 20 and 30 per cent bracket, PPF makes more sense.”

And, from the tax perspective, financial planners favour fixed maturity plans of mutual funds, which are taxed at 10 per cent without indexation and 20 per cent with indexation. Jhaveri adds, “These are very high rates and may not sustain for long. Hence, it would be helpful to revise rates higher for shorter tenure investments, the interest rate cycle for which is visible. Ten years is too far away to be able to predict the rates now.”

Neha Pandey / Mumbai June 9, 2011, 0:45 IST
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