Tax benefit extended to two post office savings schemes to bring high returns

The tax benefit extended to two post office savings schemes will help in correcting the e irregularities that had crept in when the government made 5-year bank deposits eligible for deduction under section 80C of the Income-Tax Act in the 2006-07 budget. Investments made this financial year onwards in either a five-year time deposit of the post office or senior citizen scheme will thus be eligible for deduction within the overall ceiling of Rs 1 lakh.

This move is going to benefit taxpayers who were planning to invest in the post office term deposits. The collection under the post office schemes had gone down due to the difference in the interest rate between the bank deposits and the postal schemes, a primary source of accumulation to the National Small Savings Fund (NSSF). The tax treatment for 5-year deposits announced last year only helped to further skew the balance.

The latest decision taken by the government under pressure from states will bring relief but will partly succeed in restoring the balance, given that banks continue to offer more competitive rates on deposits. Moreover, mutual fund yields are far more attractive. If there is a decline in the growth of fresh accumulation to the post office savings schemes has implications for financially weak state.

States were bided to borrow from the NSSF to part finance their annual budget and the share of a state’s borrowing from the NSSF depends on fresh collection in that state. To cover deficit in their expenditure plans, many states were forced to borrow from the market. For a state with a poor financial record, such market borrowings will be more expensive than loans from NSSF.

The decision to restore bonus at the rate of 5% on the 6-year 8% monthly income schemes upon maturity would enable returns on such deposits comparable with the yield on banks deposits and government securities. Such deposits yielding 8.3% annually, currently will return 8.9% with the bonus.

The post office being more reachable than commercial banks and having a balance of Rs 4.59 lakh crore in more than 16 crore accounts across eight schemes, such efforts to treat post office account holders on same level with those saving with the commercial banks will help increase equity among various classes of savers.