Any modifications (read rationalisation) in the small savings segment which comprises avenues like the National Savings Certificate and Public Provident Fund (PPF) can be a contentious issue considering the high levels of investor interest.
However, the rationalisation process is imperative in view of the fiscal stress these schemes cause the exchequer. Also actions like scrapping of the 6.50% (tax free) GOI Bonds, Deposit Scheme for Retired Government Employees (DSRGE) and Deposit Scheme for Retired Employees of Public Sector Undertakings (DSREPSU) are indicative of the policymakers' intentions to go ahead with the process.
What should happen?
A section of investors might be tempted to believe that the recent hike in rates offered by the Employees Provident Fund might spill over to the small savings schemes as well.
We believe the abovementioned move was not driven by economic considerations and investors would do well to simply treat it as a one-off event.
We at Personalfn have for some time now maintained that the small savings segment needs an overhaul if it is to remain viable over the long-term; recommendations made by the Rakesh Mohan Committee on small savings could provide the road map for these changes.
One of the most important recommendations is that, interest rates offered by small savings schemes should be benchmarked against yields on government securities of similar tenure (as a result, the interest rate offered by 3-year post office time deposit, should be in line with return offered by a 3-year government bond).
Effectively returns offered by schemes from the small savings segment will become "market-determined"
Also the Committee has recommended discontinuance of the NSC and Kisan Vikas Patra (KVP). The only scheme which has been spared the rod is the PPF; the Committee feels that the scheme should continue "in its present form for some time".
What is likely to happen?
We believe a watered-down version of the abovementioned recommendations will find place in the forthcoming Budget.
Tax concessions are another area where the segment could suffer a setback. Tax rebates under Section 88 on schemes like NSC and deductions under Section 80L add to the allure of small savings schemes.
A revamp in the area of tax concessions as recommended by the Kelkar Committee report cannot be ruled out; this in turn would have a significant impact on the small savings segment.
Similarly we could also see the launch of 'investor segment-centric' schemes akin to the Senior Citizens Savings Scheme.
It is unlikely that the small savings segment will continue in its present form; investors should brace themselves for a more "rational" avataar going forward.
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