A Government committee has suggested raising interest rates on Post Office savings bank deposits to four per cent, a suggestion that co...
A Government committee has suggested raising interest rates on Post Office savings bank deposits to four per cent, a suggestion that could benefit lakhs of small depositors.
The Committee on Small Savings also recommended linking returns on other small savings schemes with interest rates on government securities.
It has also suggested that Kisan Vikas Patra (KVP) be withdrawn and annual investment limit for the popular Public Provident Fund (PPF) be raised to Rs 1 lakh from Rs 70,000 at present.
Detailed Recommendation on PPF: The Committee considered the suggestion of the Department of Posts and some of the State Governments of an increase in the annual investment limit on PPF to 1 lakh from the current ceiling of 70,000 to coincide with the ceiling on Section 80C of the I.T. Act. The Committee noted that in the past, the investment limit on PPF used to be usually revised in tandem with that of the exemption ceiling for Section 80C. In the last instance, however, notwithstanding the upward revision of Section 80C from `70,000 to 1 lakh, the investment limit under PPF was not raised. Keeping in view the tenor of PPF and the need to reduce the ALM mismatch of NSSF, the Committee recommends an upward revision in the investment limit to 1 lakh. The Committee is, however, aware that the current provisions permitting premature withdrawal/taking advance against deposits is not in sync with the objectives of the scheme. More importantly, it is not considered practicable to monitor the end use of the funds withdrawn prematurely. Keeping in view the above considerations, the Committee, therefore, recommends that the rate of interest on advances against deposits may be fixed at 2 percentage points higher than the prevailing interest rate on PPF (as against 1 per cent at present).
The committee recommended that interest rates for Post Office savings deposits be raised to four per cent from 3.5 per cent at present, in line with the Reserve Bank's decision to hike rates on savings bank deposits.
Under the new formula, suggested by the committee headed by RBI Deputy Governor Shyamala Gopinath, small savings schemes would provide better returns to investors.
Interest rate for one-year deposit scheme would go up to 6.8 per cent from 6.25 per cent, while returns for the PPF would improve to 8.2 per cent from 8 per cent.
With regard to taxing returns on the small savings schemes, the committee said the issue should be considered by the government while firming up the Direct Taxes Code ( DTC )), which seeks to replace the Income Tax Act, 1961.
Noting that the small savings schemes are agent-driven, the committee suggested that the commission on them should be gradually reduced from four per cent to one per cent.
Savings Certificates
The Committee noted the observations made on savings certificates, viz., KVP and NSC by the Rakesh Mohan Committee that both these instruments are quite expensive in terms of the effective cost to the Government and should be discontinued. The Committee is, however, of the view that while KVP may be discontinued as it is prone to misuse being a bearer-like instrument, NSC could continue with the following modifications: (i) Two NSC instruments would be available with maturities of 5 years and 10 years; (ii) The interest rates would be benchmarked to 5 year and 10 year government securities; and (iii) income tax exemption under section 80C on accrued interest would not be available. Since income tax exemption under section 80C on deposits under NSC would be available, NSC may not be encashed before maturity. NSC would, however, continue to be eligible as collateral for availing loans from banks, as hitherto.
TDS, CBS and KYC
TDS, CBS and KYC
The rationalisation of instruments is aimed at achieving public policy objectives of catering to the needs of financial security of small savers. The nomenclature of ‗small‘ savings and the higher than market rate of interest makes it imperative to place a ceiling on investments in individual instruments so that the schemes cease to pose a fiscal burden on the Centre and the State Governments even while adequately catering to the interests of the target groups. Ceilings may also be strictly enforced, since these instruments are not subject to TDS. The Committee is not recommending any change on TDS on small savings instruments but is of the view that the issue of TDS on small savings instruments may be considered by the Government while drafting the DTC.
In the absence of the use of core banking solution (CBS) linking all post offices at present, it is possible for individuals to avoid the ceiling on various instruments by parking their savings across more than one branches. In future, since the Department of Posts is undertaking CBS in major post offices, it would be possible to enforce the ceiling for a majority of small savers.
Further, KYC may be enforced strictly to prevent money laundering/generation of black money. The computerization and the introduction of CBS among postal savings bank branches would enable monitoring of the adherence to the investment limits prescribed for various small savings instruments.
Rationalisation of Instruments
The Committee‘s recommendations on the rationalization of instruments of small savings are as under:
Savings Account Deposits
The Reddy Committee (2001) had recommended that as long as the rate of inflation is more than 3.5 per cent, the rate of interest on postal savings deposits may continue to be 3.5 per cent. Incidentally, the rate of interest on postal savings deposits had been aligned with the savings deposit rate of commercial banks since March 2003. The Reserve Bank has since increased the savings bank deposit interest rate from 3.5 per cent to 4.0 per cent, effective May 3, 2011 since the spread between the bank savings deposit and term deposit rates had widened significantly. The Committee is of the view that the postal savings deposit rate may be similarly raised by 50 bps to keep it in alignment with bank savings deposit rate. Further, the Reserve Bank has advised scheduled commercial banks to pay interest on savings bank accounts on a daily product basis with effect from April 1, 2010. The Committee is of the view that the Government may consider applying the same formula for the calculation of the interest on savings deposits of post offices once the post offices are fully computerised. On the issue of relaxation/removal of the ceiling, the Committee considered the following two options: if the ceiling has to be removed, the interest income may not be exempt from income tax under Section 10 of IT Act. Alternatively, if the income tax Comprehensive Review of NSSF exemption is to continue, the current ceiling may be retained. Taking into account the above considerations and the need for harmonisation with the DTC code removing most tax exemptions, the Committee favours the first option.
5 Year Recurring Deposit Scheme
To improve the liquidity of the scheme which is needed more by the smaller savers, the Committee is in favour of a reduction in the lock-in period of the scheme from 3 years to 1 year. The penalty on premature withdrawal could be fixed at 1% lower rate of interest than time deposits of comparable maturity. The rate of interest could be benchmarked with G-sec yields of 5 year maturity as was recommended by the Reddy Committee. The 4 per cent commission payable to agents makes it an agent driven scheme. Financial literacy programmes should promote postal savings instruments and the commission should be progressively reduced to 1 per cent over a period of up to three years (by a minimum of 100 bps each year).
Time deposits (of 1, 2, 3 and 5 year maturity)
The postal time deposits, designed to promote thrift, may not enjoy similar liquidity as bank deposits. However, the liquidity of postal time deposits could be improved keeping in view the interest of the small savers. Accordingly, if withdrawn within 6-12 months, the Committee recommends that savings bank deposit rate may be paid (as against nil at present). If deposits are withdrawn prematurely after 1 year, a 1 per cent lower rate of interest than time deposits of comparable maturity may be offered.
Monthly Income Scheme (MIS)
Keeping in view the higher interest rate (inclusive of 5% maturity bonus) on MIS vis-à-vis market rates, the Committee recommends that the bonus should be abolished and the effective rate of interest be aligned with the market rate. Further, the Committee favours retaining the present ceiling on MIS as it would adequately serve the interests of the small savers. The Committee also favours a reduction in the maturity of MIS to five years with the rate of interest benchmarked to 5 year G-secs.
Senior Citizens’ Savings Scheme (SCSS)
The Committee is of the view that SCSS is serving a useful goal as an instrument of social security. At the same time, the bank dominated intermediation of savings under SCSS appears to reflect the rural-urban distribution of the savers under this scheme. As a higher mark-up of 100 basis points over 5-year G-sec security (as against 25-50 basis points proposed for other schemes) is recommended, the Committee is currently not in favour of an upward revision in the investment ceiling, presently fixed at 15 lakh and deemed adequate, keeping in view the fiscal implications.
COMMENTS