Small Savings Interest may reduce - Government considereing to link with prevailing market rate.
The government is considering to deregulate interest rates on small savings schemes like public provident fund (PPF) and post office deposits, linking them to the prevailing interest rates in the markets.
The move will reduce returns on such schemes. At present, the interest rates on small savings schemes are fixed by the government, which are normally higher than the prevailing interest rates in the market. For example, the interest rate on PPF is 8%, which is tax-free, while that on the other similar instruments like bank deposits are lower.
The post-tax return on bank deposits is around 5.5% for those who fall in the highest tax bracket of 30%.
Towards this end, the government has set up a committee under the Reserve Bank of India deputy governor Shyamla Gopinath — to suggest the ways and means — for deregulating interest rates on small savings schemes. Small savings schemes mobilise huge amount of funds as they offer higher interest rates.
According to the Budget estimate, in 2010-11, these schemes may fetch Rs 50,300 crore, taking the total mobilisation to Rs 7,57,000 crore.
Funds mobilised under small savings schemes are disbursed to the central and state governments as debt. As the cost of the small savings funds are high, state governments pay higher interest rates (9.5%-10%) on the loans taken from these schemes compared to other sources in the market.
The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested to bring down the interest rates on outstanding loans to 9% by the end of 2009-10.
But for this, the interest rates on small savings should also be brought down.
At the same time, according to the Fiscal Responsibility and Budget Management (FRBM) Act, states cannot borrow from open market beyond 4% of their fiscal deficits. Therefore, states are not able to benefit from prevailing lower interest rates in the market and take higher-interest loans from small savings.
The committee will also examine the new investment opportunities for the funds mobilized under small savings schemes. At present, the funds could be invested only in the central and state governments special securities. Committee will also review the administrative arrangement including the cost of operation.
Source : Times of India

NPS HAS A TAX EDGE, BUT WATCH OUT FOR ANNUITIES
The New Pension Scheme (NPS) is likely to get a makeover if the revised Direct Tax Code is implemented. However, the government is doing its bit tolure investors to take a close look at the NPS. Recently, the government announced the ‘Swavalamban’ scheme through which it would add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme in this financial year. Any NPS subscriber who invests Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get Rs 3,000 free from the government.

The likely DTC impact
The revised DTC, if implemented without any changes, will keep the NPS out of the tax net. This new change will make the NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS, which implies the NPS will be exempt from taxes at all the three stages of deposit, appreciation and withdrawal. Earlier, the NPS proceeds were taxable at maturity.

Advantages
One of the major advantages is also the lowest fund management charge, which is Rs 99 per lakh (0.0009%) compared to charges of a pension plan offered by an insurance company, which is around 0.75-1.75% per year. This low-cost structure makes it more attractive than most annuity/pension plans offered by insurance companies, financial advisors say. The custodian charges are in the range of 0.0075% to 0.05%. Despite all charges, the cost of investment is cheaper than charges of mutual find and ULIPs.

How does it work?
Investors have an option to choose their investment mix among three categories. The first one (E) refers to high investment exposure in equity, which targets investors with a high risk appetite. Equity investment, however, is capped at 50%, which mainly comprises index funds. The second option (C) is high exposure in fixed income instruments, which targets investors of a moderate risk profile. These instruments include liquid funds, corporate debt instruments, fixed deposits and infrastructure bonds. The last option is pure fixed investment products (G) which offer low returns. Ideally, you should start investing for your retirement in your early thirties. If you have the advantage of longer investment horizon (20 years plus), equity is the best option to start with. But in the case of the NPS, you have to buy a life annuity offered by life insurance companies. The NPS requires the investor to use the retirement corpus to buy annuities to avoid taxation. As per the existing stipulations, you have to invest 40% of the corpus in annuities.

Other alternatives
Annuity plans which don’t return the purchase price offer 8-9% and the ones that return the purchase price offer 50% a year are other options. Any bank deposits over five years, which offered 10% a couple years ago, offer around 8-8.5% today because of a decline in interest rates. There are other assured monthly income options like the Senior Citizens’ Savings Scheme (SCSS) which offer 9%, PPF at 15% and the post office monthly income scheme at 8%.
Courtesy : Economic Times

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