Rationalisation has been the key word for small savings schemes in recent times. However instead of adopting the conventional method i.e. pruning returns, the authorities have adopted a rather innovative approach.
Firstly, Section 80L was omitted. This was a blow to investors since interest earnings from investment avenues like fixed deposits, National Savings Certificate and Post Office Monthly Income Scheme among others were eligible for deduction under the aforementioned section. Scrapping of the section meant that investors' earnings from these avenues became chargeable to tax. This in turn adversely affected their attractiveness on a post-tax basis.
Further, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family. That left only individuals with the option to invest in these schemes. By preventing a large section of the investor community from participating in the segment, the authorities took another step towards reducing the fiscal burden caused by small savings schemes.
Subscribers to the Employees' Provident Fund had to face a reduction in interest rates. The rate of return for contributions to EPF was reduced from 9.5 per cent to 8.5 per cent for the year 2005-06.
The intention was clear - the small savings segment in its present form is unwieldy and needs to be shaped up. The order of the day is a rational structure that offers returns in line with market rates.
What is likely to happen?
We believe the rationalisation process is an irreversible one and will continue going forward.
"EET"" is probably the most dreaded buzzword for investors from the small savings segment. While presenting the Union Budget 2005-06, the finance minister had proposed adopting the EET (exempt-exempt-taxed) system of taxation instead of the EEE (exempt-exempt-exempt) system while dealing with savings schemes.
Under the EET system contributions to the scheme are exempt from tax (E), the accumulation/earnings are also exempt (E); however, the withdrawal/benefits are taxed (T). The implementation of EET could mean that the sheen is taken off some of the small savings schemes due to the loss of tax sops.
Alternatively, the emergence of a dichotomous structure cannot be ruled out. For example, while attractive returns/tax sops could be made available to investors in lower income brackets, those in higher income brackets might have to deal with a toned down/rational structure.
Clearly, the era of attractive returns coupled with tax sops could become a thing of the past for some investors.
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