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Is this the future of small savings schemes?

August 13, 2004 12:42 IST

Rationalisation of returns offered by small savings schemes has been much debated in recent times. Despite the immense popularity enjoyed by these schemes, they cause fiscal stress to the government, thanks to the attractive rates offered.

The recommendations made by the Rakesh Mohan Committee for Small Savings Schemes were recently made public.

One of the most important recommendations made in the report is that interest rates offered by small savings schemes should be benchmarked against yields on government securities of similar tenure (so the interest rate offered by 3-year post office time deposit, should be in line with return offered by a 3-year government bond). In simple words, small savings instruments will offer 'market-determined' returns.

While interest rates are proposed to be changed once a year, a limit of 1% has been set for rate changes between years. So if the rate this year is 8%, in the following year, the new rate has to be within the range of 7% to 9%.

The report treats Public Provident Fund as a long-term savings scheme providing old age income security, hence considers "it is desirable to continue the scheme in its present form for some time."

Similarly, no change has been recommended in the structure of post office schemes like the savings bank account, monthly income schemes, recurring deposit and time deposit.

This concession is granted subject to the condition that their tax treatment is similar to comparable instruments, like bank deposits. However, the interest rate will now be market-determined.

Now the shocker; the axe falls on National Savings Certificates and Kisan Vikas Patras. The committee recommends that both these instruments be discontinued.

Similar treatment is suggested for the 6.5% (Tax-Free) GOI Bonds too, a recommendation which has found place in the recent budget. The 8% (Taxable) Bond should continue but after the interest rate is aligned with the market rate.

The committee suggests that the special deposit scheme meant for retiring government and public sector employees should be discontinued. Instead a proposal has been placed for a 'Dada-Dadi Bond Scheme' for senior citizens.

This is another proposal which found place in the recent budget in the form of Senior Citizens Savings Scheme.

What is likely to happen?
We, at Personalfn, believe that the rationalisation process in small savings has begun and will continue.

Investors should note that despite leaving the small savings rates unchanged, the finance minister discontinued the 6.5% (Tax-Free) GOI Bonds. However, at what speed this rationalisation process will take place is anyone's guess.

What should investors do?
Firstly brace yourself for the likely changes. Investors who have never considered investment options beyond the small savings domain might find the new scenario difficult to digest. However, the transition to market-linked returns will have to be made.

The new proposals are unlikely to impact existing investments. Investors should consider getting invested and locking their investments at present levels. These investments will fetch them attractive rates and be insulated against future changes.

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