THE recommendation of Shyamala Gopinath committee to scrap Kisan Vikas Patra (KVP) scheme, if implemented, will choke one of the channels which is suspected to be misused for parking black money.
The market-oriented reforms that the seven-member official panel has suggested in the national small savings schemes will also have far-reaching implications for the way you and me save our money, bankers and financial experts, including those on the panel, told Financial Chronicle.
The post office monthly income account, meant to provide regular income to small depositors, has been used by large depositors to take advantage of the high effective interest rate, including a bonus of 5 per cent. The scheme could turn out to be unattractive in the long-term, now that the panel has asked for abolition. Also, the proposed increase in the cap of public provident fund investments by another Rs 30,000 to Rs 1,00,000 for tax-free returns may see most taxpayers opting to put their entire savings allowance of Rs 1,00,000 under Section 80C of Income-Tax Act in this instrument.
According to bankers, the other key proposal to bring about parity in rates in bank deposits and small savings rates could see funds moving into deposits in banks, which are better equipped to service customers than post offices.
Experts concur with the panel's view that the move to scrap KVP scheme is necessary to prevent the misuse of this bearer-bond type scheme by depositors through multiple accounts.
The scheme, which doubles money in eight years and seven months, collected Rs 21,200 crore in 200910, around 10 per cent of the gross small savings. For the seven months ended October 2010, around Rs 15,000 crore had come in via the KVP route.
With no limit on investment and being available in denominations ranging from Rs 100 to Rs 50,000, experts pointed out that black money in urban areas was finding its way into the KVP route.
The recommendation, if approved, will automatically lead to a huge portion of the inflows coming into transparent financial savings instruments. The returns on KVP was reduced in 2003 by increasing the maturity period of the certificate to 8 years and 7 months for doubling the principal amount from the earlier term of five years. Despite this, KVP collections have not shown a large fall. In 2002-03, KVP collections were Rs 23,200 crore.
KVP was meant for small savers who did not have access to other savings channels. The committee has, however, noted that the continued popularity of KVP among the urban population who are not all small savers could be prompted by "an incentive to avoid tax". KVP is more popular as it is a bearer-like certificate due to its ease of transfer. Officials said due to the anxiety over the misuse of KVP through multiple accounts, the government last year made it mandatory for the subscribers to furnish their photographs. This has not eliminated the possibility of black money being parked though multiple KVP accounts.
While recommending the scrapping of KVP, the committee has now sought to plug possible misuse of other small savings instruments by asking for implementation of know-your customer norms. All instruments (other than those that are specially designed to serve as tax saving instruments) may be subject to TDS (tax deducted at source). Also, KYC may be enforced strictly to prevent money laundering/generation of black money. Similarly, the computerisation and the introduction of CBS among postal savings bank branches would enable monitoring of the adherence to the investment limits prescribed for various small savings instruments.
In the case of post office monthly income account, around Rs 54,000 crore was deposited in 2009-10 against Rs 24,000 crore in 2008-09. Currently, MIS provides monthly income and yields an effective annual rate of interest of 8.82 per cent (inclusive of 5 per cent maturity bonus) and is popular among those subscribers seeking regular additional income.
Without bonus, it will yield around 8 per cent per annum, that is, Rs 80 will be paid every month on a deposit of Rs 12000.
Whereas the term deposit rates of post offices are broadly aligned with the market rates, the effective rate of interest on MIS is significantly higher than the bank deposit rate and the G-sec yields of comparable maturities.
My gut feeling is that the removal of bonus will reduce the allure of MIS. The 8 per cent yield is not bad but the interest income is taxed.
In case of the public provident fund (PPF), subscribers use this account as a pension account by depositing a certain sum into it every year regularly as the rate of interest is 8 per cent per annum (compounded yearly). Around Rs 33,000 crore was put here in 200910, up from Rs 14,850 crore in 2008-09.
Since the deposits qualify for deduction from income under Section 80C and interest income is completely tax-free, it is an attractive scheme. If the annual investment is subject to a enhanced ceiling of Rs 1 lakh, it will be a good reason to just invest in PPF.
Bankers say that it was a long-standing demand to bring the interest on small saving schemes in line with market rates, as it would integrate all saving instruments on rates offered government securities.
But, if interest on small saving schemes are linked to market rates, banks will have an edge as bank rates are already market linked.
Apart from attracting more deposits, these recommendations will also help banks in pricing their deposits more aggressively as instruments will be at par in interest rate offerings.
Depositors choose instruments and avenue based on trust and points of services. Banks offer much better service. If the interest rates are at par, banks will have an edge due to better services.
-----------------------------------------------------------------
Also, know how to buy mutual funds online:
1) DSP BlackRock Mutual Funds:
http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html
2) Reliance Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html
3) Reliance Mutual Funds:
http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html
4) Sundaram Mutual Funds:
http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html
5) Birla Sunlife Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html
6) UTI Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html
7) SBI Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html
8) Edelweiss Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html
9) IDFC Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html
