Govt to review small savings' tax benefits

The Centre is understood to be reviewing the entire gamut of tax benefits on small savings schemes, the plan being to gradually phase out the schemes to rationalise the cost of government borrowing.

According to sources close to the development, the schemes, which are being reviewed include the postal savings deposits, postal life insurance, National Savings Certificate, Indira Vikas Patra and Kisan Vikas Patra and the special deposit scheme 1981.

The government has already withdrawn the RBI Relief Bonds and special deposit schemes for retired employees and public sector employees following the report of the Rakesh Mohan Committee on small savings.

The report was of the view that in order to reduce the cost of the government borrowing, the number of small saving schemes should be rationalised and be made taxable.

This is because after being tax exempted, return on these instruments come to 11-12 per cent, which is way above the market rates. The internal task force on small savings had further suggested for 50 basis point cut across maturities of small savings instruments.

The government is also said to be reviewing the tax benefits on infrastructure bonds. According to sources close to the development, the government is of the view that tax benefits should be available only to infrastructure bonds with maturity of seven years and above.

The finance ministry is of the view that much of the subscription to these bonds is for maturity of three to five years, which does not serve the purpose of infrastructure funding.

Yet, the government ends of paying more since the effective yield on these bonds is much higher than for normal borrowings for the corresponding period owing to the tax incentives.

To comply with the fiscal responsibility bill and cut down the fiscal slippages, the government has been consciously taking steps to bring down the cost of borrowing.

Sources feel that senior citizens bond scheme is already compensating that particular strata of society even after the closure of most small savings schemes. Thee bonds offer 9 per cent for five years.

Moreover, the inflation linked deposit scheme, which is yet to be launched by the government, will further help senior citizens.