No tax sop for savings below 6-yr maturity

NEW DELHI: The Finance Ministry has decided to grant tax exemptions to only those new savings instruments which have a lock-in period of six years or more.
This means that all new savings schemes which fall in the same category as the Public Providend Fund would enjoy tax exemptions but new schemes tailored on the lines of Indira Vikas Patra, National Savings Certificate (VII issue), Post-office Savings Scheme and 5-year Post-office Recurring Deposit Account, National Savings Scheme, ‘92 would not be eligible for tax exemptions in future. At present, all these schemes are of less than six years maturity, but enjoy tax exemption benefit under various sections of the Income Tax Act, including Section 88, Section 80L and Section 10. As a result, most of these schemes have taken on the form of tax exemption schemes, though they are strictly small savings schemes aimed at mopping up the savings of the small investors.
This decision to limit tax exemptions only to longer-term small savings schemes was taken when the government recently announced its 7% savings bonds with a six-year lock-in period for high networth individuals. The move is aimed at correcting the anomalies that exist in the small savings regime.
The decision to extend the maturity to six years was taken in context of the 7% bonds, despite the fact that it would stand unattractive compared to a similar instrument, 8% RBI relief bonds which have a 5-year lock-in period. The 7% bonds, however, do not come with an investment ceiling and would be a safe haven for those individuals who have over Rs 2 lakh to park.
The move is in line with the YV Reddy committee recommendations on small savings. However, the government is yet to take a view on the tax treatment of ongoing savings instruments which have maturities of up to six years and enjoy a tax exemption. The expert committee had recommended withdrawal of tax benefits under sections 80L, 88 and 10 of the Income Tax Act on all short and medium-term maturities (up to 6 years).
The idea is to convert these schemes as pure investment schemes and tax cover would be provided only to long-term instruments, sources said.
Withdrawal of tax exemptions from existing schemes are, however, a tricky issue and would have to be taken only with political consensus.
A first tentative step was taken two years ago, when the then finance minister Yashwant Sinha met Planning Commission deputy chairman KC Pant on this issue. The idea was, however, dropped given its political ramifications.
The political hesitation stems from the fact that the bulk of the small savers are salaried and in the middle-class bracket. Experts point out that the small savers actually do not fall in the taxpayer''s bracket but the political leadership has always been afraid of the backlash from the highly vocal, salaried, upper middle-class.
This segment is both tax-paying — is forced as tax is deducted at source — and highly vocal, and has been instrumental for some of the important budget rollbacks in recent times.