TNN | Mar 19, 2016, 02.46 AM IST | Times of India
NEW DELHI: The government on Friday announced a steep cut in interest rates on small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patras – which will fetch up to 90 basis points lower returns during the April-June quarter.
On January 14, TOI first reported that the government could reduce interest rates on small saving schemes but the extent of the reduction has taken everyone by surprise.
In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years. Although the rates are to be reviewed every three months, if they remain unchanged during the next financial year, someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.
But the announcement has not gone down well with the middle class. Angry protests have begun on social media with PPF trending on Twitter. The government, however, claimed the changes were linked to the market rate, offering a parallel to global oil prices.
A reduction in rates on small savings is also bad news for those with large balance in fixed deposits, especially senior citizens, as banks are now expected to follow government action with similar cuts.
For long, banks and RBI had urged the government to reduce small savings rates to ensure that banks cut deposit rates. This, in turn, will pave the way for lower lending rates and translate into lower EMIs in the coming months, should the banks decide to pass on the benefit. However, given that a two-three year fixed deposit (FD) with SBI fetches the highest rate of 7.5% a year, savings in PPF still remain more attractive, especially with tax benefits thrown in.
Though pressure had been building for several months, the government opted for a change from April, which is the annual date for reset. “It’s normal practice for the last few years to change interest rates from April and we have followed that. The rates are linked to the yield on government securities and we have followed the same practice with a mark up for senior citizens, Sukanya Samridhi Scheme, PPF and NSC,” economic affairs secretary Shaktikanta Das told reporters.
The government provides an annual spread of a percentage point on Senior Citizen Savings Scheme, 75 basis points (bps) on Sukanya Samridhi Scheme and 25 bps on PPF, NSC, five-year post office deposit and Monthly Income Scheme. But post office savings deposits of one-three years, KVP and fiveyear Recurring Deposits will not longer get the benefit of a higher spread.
Das said the average yield on government bonds had come down from 8.5% in 2014-15 to 7.9% during the current financial year. “It (reduction) is being done to make the rates more market aligned. This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates,” he told reporters but added that banks had to take a call on rates.
A sharp reduction in small savings rates have always been a ticklish issue politically with Yashwant Sinha facing severe criticism when he cut rates as finance minister in the Atal Bihari Vajpayee government.
Source : http://goo.gl/hBTO11
By Deepshikha Sikarwar, ET Bureau | 23 Jan, 2016, 10.31AM IST | Economic Times
NEW DELHI: Interest rates on popular small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and the Kisan Vikas Patra could soon be reset every quarter as part of the government’s plan to peg them closer to market rates to reduce market distortions and help the cause of lower interest rates.
The government will also reduce the mark-up over the benchmark government bond rate for such schemes of small maturities to nudge short term rates lower.
High interest rates on small savings schemes have long been cited as a structural barrier to interest rates coming down as they compete with bank deposits, but are not subject to the same kind of market pressures as them. Because they stay high, bank deposit rates are forced to remain high and therefore prevent lending rates from coming down.
A senior government official said the first reset under the new rules will happen from April 1 this year and rates are expected to fall. A notification will be issued soon, this official said, adding that interest rates on schemes for senior citizens and a scheme for girl children were not likely to be revised.
Small savings’ interest rates are linked to yields on government bonds of comparable tenure, but unlike gilts that are traded daily and see yields change, these change only sparingly.. The last revision in rates on these schemes was on April 1last year. Since then, market rates have moved south following a 0.75 percentage point policy rate cut by the Reserve Bank of India, creating a wide wedge between what the banks can offer and what is available on small savings.
State Bank of India, for example, offers 7 per cent on deposits of maturity of five years or more. Deposits of such tenure fetch 8.5 per cent in a post office small savings account. The PPF rate for a similar maturity is 8.7 per cent. This wide gap between small savings’ and market rates impacts deposit mobilisation by banks as their ability to reduce deposit rates is adversely impacted. This impacts banks’ ability to lower lending rates as well.
A quarterly reset of small savings rate will ensure that distortion in the rates caused by the small savings is kept to a minimum, officials said. The weighted average yield of dated government securities was 7.9 per cent in April-September 2015 compared with 8.81 per cent in the first half of the preceding year, potentially opening up the possibility of an up to one percentage point reduction in the small savings rate.
In their pre-budget meeting with Finance Minister Arun Jaitley earlier this month, banks and financial institutions had also suggested quarterly benchmarking of rates.
Source : http://goo.gl/LBLfSt
By Neha Pandey Deoras | Jan 12, 2015, 06.40AM IST |Times of India
ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.
The hike in the deduction limit under Section 80C means that a taxpayer can reduce his tax by up to Rs 15,000. But the higher limit may not be of much use if you don’t know which tax-saving option suits you best. ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.
There are compelling reasons why ELSS funds should be part of the equity allocation in a taxpayer’s investment portfolio in 2015. Returns in past three years 27.34%. They may be low on safety but they score full points on all other parameters. The returns are high, the income is tax free, the investor is free to alter the time and amount of investment, the lock-in of 3 years is the shortest among all tax saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option and the cost is even lower if you go for the direct plans of these funds.
Smart tip: Invest in the dividend option which acts as a profit-booking mechanism and also gives you liquidity. Dividends are tax-free.
For a lot of people, Ulip is still a four letter word. However, investors need to wake up to the new reality.
An ordinary Ulip is still a costly proposition for the buyer. But the online avatar of these marketlinked insurance plans is a low-cost option far removed from what was missold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. Ulips can be used as a rebalancing tool by the savvy investor. He can switch from equity to debt and vice versa, without any tax implication. Buy a Ulip only if you can pay the premiums for the full term. Also, take a plan for at least 15 years. A short-term plan may not be able to recover the high charges levied in the initial years.
Smart tip: Don’t invest in the equity fund at one go.
Invest in a liquid fund and then shift small amounts to equity fund.
Budget 2014 also hiked the annual investment limit in the PPF. Returns 8.7%. Risk averse investors can now sock away more in the ultra-safe for 2014-15 scheme. The PPF scores high on safety, taxability and costs, but returns are not so attractive and liquidity is not very high. The scheme will give 8.7% this year but don’t count on this in the following years. The interest rate on small savings schemes such as the PPF is linked to the government bond yield and is likely to come down in the coming years.
Smart tip: Open a PPF account in a bank that allows online access. It will reduce the effort.
SR CITIZENS’ SAVING SCHEME
The Senior Citizens’ Saving Scheme (SCSS) is an ideal tax saving option for senior citizens above 60. Returns 9.2%. The money is safe and for 2014-15 returns and liquidity are reasonably good. However, the interest income received from the scheme is fully taxable.The interest rate is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield. Unlike in case of the PPF, the interest rate will remain unchanged till the investment matures.
Smart tip: Stagger your investments in the Senior Citizens’ Saving Scheme across 2-3 financial years to avail of the tax benefits.
The New Pension Scheme (NPS) is yet to become a popular choice because of the complex procedures involved in opening an account. Returns 8-11% in past five years. But investors who managed to cross that chasm have found it rewarding. NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those of the Nifty, while corporate bond funds and gilt funds have given close to double-digit returns. But financial planners believe that the 50% cap on equity investments is too conservative. The other sore points is the lack of liquidity and taxability of the income. The annuity income will also be fully taxable.
Smart tip: Start a Tier II account to benefit from the low-cost structure of the NPS.
BANK FDS, NSCS
Bank FDs and NSCs score high on safety, flexibility and costs but the tax treatment of income drags down the overall score. Returns 8.5-9.1% for 2015. The interest rates are a tad higher than what the PPF offers but the income is fully taxable at the slab rate applicable to the individual. They suit taxpayers in the 10% bracket (taxable income of less than `5 lakh a year). The big advantage is that these are widely available. Just walk into any bank branch and invest in its tax saving fixed deposit.
Smart tip: Build a ladder by investing every year.After the fourth year, just reinvest the maturity amounts in fresh deposits.
Pension plans from insurance companies remain costly investments that are best avoided. Returns in past three years 8-18%. Instead, it may be a better idea to go for retirement funds from mutual funds. They give the same tax benefits but don’t force the investor to annuitise the corpus on maturity. He is also free to remain invested beyond the age of 60. Till now, all the pension plans were debt-oriented balanced schemes.Last week, Reliance Mutual Fund launched its Reliance Retirement Fund, an equity-oriented fund.However, ELSS schemes and Ulips can be used for the same purpose.
Smart tip: Wait for the launch of retirement funds and assess their performance before investing.
Traditional insurance plans are the worst way to save tax. Returns 5.5-6%. They require a multi-year commitment and give very poor returns. The insurance for 20 year regulator has introduced some plans customer-friendly changes but these plans still don’t qualify as good investments. The only good thing is that the income is tax free. But then, so is the income from the PPF and tax free bonds. Another positive feature is that you can easily get a loan against such policies, which gives some liquidity to the policyholder.
Smart tip: If you have a high-cost insurance plan, turn it into a paid-up policy to ease the premium burden.
Source : http://goo.gl/lAQFGL
ET Bureau | Nov 18, 2014, 08.08AM IST | Economic Times
NEW DELHI: The government will relaunch the Kisan Vikas Patra scheme on Tuesday, hoping to lure investors away from gold and fraudulent schemes by offering attractive terms. There won’t be any upper limit on investments, the minimum denomination being Rs 1,000.
Investors will be able to double their money in 100 months but the government has bundled in a number of features to enhance liquidity of the instrument as the new regime looks to raise the level of financial savings that fell to 7.1 per cent of GDP in FY13 from more than 12 per cent in FY10.
“Kisan Vikas Patra was a popular instrument among small savers. I plan to reintroduce the instrument to encourage people… to invest in this instrument,” FM Arun Jaitley had said in his budget speech in July.
The government has already rolled out an ambitious scheme, Pradhan Mantri Jan Dhan Yojana, to ensure financial inclusion. Nearly 8 crore accounts have been opened under the scheme so far. “The (Kisan Vikas Patra) scheme will safeguard small investors from fraudulent schemes,” the finance ministry said in a statement.
The popular scheme had been closed in 2011 as part of the government’s drive to rationalise small savings schemes. “Re-launched KVP will be available to investors in denominations of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000, with no ceiling on investment,” the statement said.
The certificates, which will be initially issued by post offices, can be bought in single or joint names and can be transferred from a person to another multiple times. Investors will also be able to transfer them from one post office to another, and later they could be made available through nationalised banks as well.
The certificates can be used as collateral to avail of loans. As an additional liquidity feature, investors will also have an exit option after two years and six months, and every six months thereafter at a pre-determined exit value. There are no tax benefits as of now for investments in the scheme that will yield an annual rate of nearly 8.7 per cent, more than most other small savings instruments.
“With a maturity period of eight years and four months, the collections under the scheme will be available with the government for a fairly long period to be utilised in financing developmental plans of the Centre and state governments and will also help in enhancing domestic household financial savings in the country,” the statement said.
It also sought to allay concerns that the scheme could be used to launder black money. “KYC (know-your-customer) norms regarding all National Savings Schemes (NSS) are now applicable in post offices and banks with effect from January 2012,” the statement said.
The KYC rules can help tap big-ticket transactions.
Source : http://goo.gl/iBmU0J