Managing money requires more skill than making it. That is why it is important to invest wisely by optimally balancing both risk and returns. Private investments such as deposits with commercial banks and mutual funds have been attractive due to convenience and better liquidity. On the other hand, investments in government saving schemes have been popular with investors as they are considered secure investments. On July 8, 2010, the Centre constituted an expert committee under the chairpersonship of Shyamala Gopinath, Deputy Governor, Reserve Bank of India, for a comprehensive review of the National Small Savings Fund. The committee submitted its report in June. Broadly, recommendations in the report include increasing liquidity, linking returns on small savings with returns on secondary market yields of comparable government securities, etc. Let us now see the available savings options, the tax implications on them under the Income-Tax Act, 1961, and what suggestions the committee has for some of these schemes.
15-Year Public Provident Fund: Public Provident Fund, or PPF, with its various tax benefits, is a popular saving instrument. Falling in the Exempt Exempt Exempt (EEE) regime, an amount invested in PPF is deductible under Section 80C of the I-T Act. (Under the section investments of up to Rs 1 lakh per financial year in specified instruments will be eligible for tax deductions). Interest generated in the account (approximately 8% compounded annually) is tax-free. Further, withdrawal amount is also tax exempt. Investment in PPF is currently restricted to Rs 70,000 per financial year (FY). However, the committee has recommended that the limit be increased to Rs.1 lakh per FY, to align it with the ceiling of Section 80 C of the I-T Act.
National Savings Certificates: Investment in National Savings Certificate, or NSC, qualifies for deduction under Section 80C of the I-T Act. The interest accrued is taxable in the hands of the individual. However, the annual interest accrued is deemed to be reinvested (except interest in the maturity year) and, thus, qualifies for deduction under Section 80C of the I-T Act. The committee's report has, however, proposed that the benefit under Section 80C of the I-T Act on the accrued interest on NSC be withdrawn. Currently, NSC is issued for a fixed term of six years and offers 8% interest, compounded half yearly. The committee's report says that two NSC schemes be introduced with maturity periods of five years and 10 years and the interest rates be benchmarked to the five-year and 10-year government securities.
Post Office Schemes: Investments in five-year time deposit qualifies for deduction under Section 80C of the I-T Act, subject to the overall limit of Rs 1 lakh in an FY. However, interest earned on the deposit is liable to tax. These deposits offer interest varying from 6.25% to 7.5% depending on the period of deposit. With respect to savings account, from FY 2011-12, interest income of Rs 3,500 (in single account) and Rs 7,000 (in joint account) is exempt from tax under Section 10(15) of the I-T Act. There is also a proposal in the Committee Report to increase the interest rate on savings accounts from current 3.5% to 4%.
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