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) that 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-year 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-year 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
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