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
Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1.
By: FE Bureau | New Delhi | February 11, 2016 2:04 PM | Financial Express
Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1. Henceforth, the interest rate would also be reset on a quarterly basis instead of annual basis. An official announcement in this regard is expected in a day or two.
Without mentioning how much the reduction would be in the interest rates, economic affairs secretary Shaktikanta Das on Thursday said the spread of 25 bps (above the average yield from government securities with similar maturity) available now for the small saving schemes below five years, would be reduced. “But for long term saving schemes of above five years, the spread will be protected because the government has taken into consideration the interest of the small savers and the need to encourage long term savings,” Das said. Even if the spread is maintained for long-term savings, the actual interest rate on these could come down a bit as yields on government securities have declined over the past year, analysts say.
Though small savings rate are usually determined to be 25 basis points above the average yield from government securities with similar maturity in the previous year, there have been three instruments that carry even higher rates: Sukanya Samriddhi Account, the Senior Citizens Savings Scheme and the National Small Saving Certificates (NSC). While the proposed changes won’t impact the high interest bearing schemes for the girl child and senior citizens, there could be some reduction in the NSC rates also.
Once these rates are announced, it is expected that bank deposit and lending rates to also fall. While the Reserve Bank of India has been cutting rates, banks have passed on less than half of the cuts on account of high rates on small savings schemes. Bankers say if they cut rates, much of their deposits would flow into small savings schemes.
For example, one-year postal deposit offers 8.4% where as State Bank of India offers 7.25% for deposits of the same tenure (7.5% for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2% interest for a period up to 10 years while SBI offers only 7% on term deposits of 5-10 years (7.25% for senior citizens).
The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh cr after accretion of Rs 52,000 cr in 2015-16.
Source : http://goo.gl/X6e92J
Babar Zaidi | TNN | Jan 11, 2016, 08.57 AM IST | Times of India
Do-it-yourself tax planning can be rewarding and challenging. Rewarding, because you can choose the tax-saving instrument that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters—returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.
While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!
ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency. The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.
If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund. Last year was not good for equities, and even top-rated ELSS funds lost money. However, the funds are miles ahead of PPF in 3- and 5-year returns.
The SIP route is the best way to contain the risk of investing in equity funds. However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.
Opt for the direct plan. Returns are higher because charges are lower.
The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What’s more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.
Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.
The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of Rs 50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.
Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity. Right now, the income from annuities is taxed at the normal rate.
Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.
PPF AND VPF
It’s been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.
Allocate 25% of your pay hike to VPF. You won’t notice the deduction.
SUKANYA SAMRIDDHI SCHEME
This scheme for the girl child is a great way to save tax. It is open only to girls below 10. If you have a daughter that old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Accounts can be opened in any post office or designated branches of PSU banks with a minimum Rs 1,000. The maximum investment in a financial year is Rs 1.5 lakh and deposits can be made for 14 years. The account matures when the girl turns 21, though up to 50% of the corpus can be withdrawn after she turns 18.
Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.
SENIOR CITIZENS’ SCHEME This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a Rs 15 lakh overall investment limit.
If you want ot invest more than Rs 15 lakh, gift the amount to your spouse and invest in her name.
BANK FDS AND NSCs
Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the Rs 15 lakh limit in the Senior Citizens’ Saving Scheme.
Invest in FDs and NSCs if you don’t have time to assess the other options and the deadline is near.
Pension plans from insurance companies still have high charges which makes them poor investments. They also force the investor to put a larger portion (66%) of the corpus in an annuity. The prevailing annuity rates are not very attractive. Pension plans launched by mutual funds have lower charges, but are MFs disguised as pension plans. Moreover, they are debtoriented plans so they are not eligible for tax benefits that equity plans enjoy.
Invest in plans from mutual funds. They offer greater flexibility than those from life insurers.
Traditional life insurance policies remain the worst way to save tax. Still, millions of taxpayers buy these policies every year, lured by the “triple benefits” of life insurance cover, longterm savings and tax benefits. Actually, these policies give very little cover. A premium of Rs 20,000 a year will get you a cover of roughly Rs 2 lakh. The returns are very poor, barely 6% if you opt for a 20-year plan. And the tax-free income is a sham. Going by the indexation rule, if the returns are below the inflation rate, the income should anyway be tax free. The problem is that once you sign up for these policies, they become millstones around your neck.
If you can’t afford to pay the premium, turn your insurance plan into a paid-up policy.
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