In post offices there is monthly income account scheme, recently the government has announced a 5% bonus for this (POMIA ) scheme. The government took this decision to draw investors who have moved away from banks because of higher interest rates.
From this one gets an early indication of what voters can expect in the 2008 Budget. In order to impress investors, the government announced five-year post office deposits and the postal department’s senior citizens savings scheme would be eligible for Rs 1-lakh income tax exemption.
The senior citizens savings scheme offered at post offices and the five-year postal deposits have now been brought in equality with five-year bank deposits in terms of tax exemption. While small investors have reason to cheer, but this move of government may push banks to hike interest rates on term deposits in order to maintain sheen.
The two post office schemes will be able to avail tax exemption benefit under Section 80C of the Income Tax Act, 1961 from April 1, 2007. This could also be a indicator that the government may consider of increasing the income tax exemption limit in the forthcoming budget.
The 5% bonus on the post office monthly income account (POMIA) scheme, will be given on deposits made in new accounts. This benefit will be available on investments in new accounts opened on or after December 8, 2007. Together with the bonus, the effective yield will be 8.9% as against 8.3% currently available under the scheme.
“The return of 8.9% compares very favorably with the return on bank deposits or government securities of comparable maturity,” the statement said.
The hike in interest rates by banks could clearly be seen on the postal small savings schemes’ fund. There was a sharp decline in the deposit mobilization by postal small savings to Rs 1,54,418 crore in 2006-07 from Rs 1,73,308 crore. In the first quarter of the fiscal (April-June, 2007-08), deposit mobilization was at Rs 31,002 crore whereas withdrawal was Rs 34,211 crore.
While there was demand that the five-year post office time deposit account and the senior citizens savings scheme should enjoy the same tax treatment as five-year bank deposits. The government looked at these requests in consultation with the state governments.
Last month, it invited the state finance ministers to send their responses to certain proposals. According to a press release, “These responses have since been received and examined carefully.”
A finance ministry statement said: “Government attaches great importance to promoting small savings. Small savings schemes are safe and secure avenues for keeping the savings of citizens, especially in semi-urban and rural areas. It is also important that the interest rates applicable to small savings schemes should be comparable to the interest rates that are available on other savings instruments of comparable maturity.”
A post-office time deposit account is a service similar to a bank fixed deposit. The duration of the deposits can be made for a minimum period of one year to two years, three years and a maximum five years.
But, the tax exemption would be available only for the five-year scheme, which offers 7.5% interest. The senior citizen scheme offers 9% interest.
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