The Telegraph
Since 1st March, 1999
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Rewards for savers

New Delhi, June 4: The government plans to introduce fresh incentives for savings as well as new instruments whose returns will be linked to inflation. Simultaneously, it will cut the number of small saving schemes.

It is not inclined to accept recommendations made by a committee to do away with incentives for small savings and tax exemption for interest income from bonds, besides withdrawal of the standard deduction allowed before calculating taxable income.

Instead, tax exemptions for profits made from selling shares (called long-term capital gains) are likely to be continued for another year at least. The move is being considered to pacify investors panic-stricken by the stock market’s roller-coaster ride.

The ministry is also likely to extend tax benefits to investments in new pension schemes that are likely to be launched later this year by a number of private players. Pension funds will be allowed to invest in a wide range of instruments, low risk continuing to remain the guiding factor. These funds will also have to offer at least one fixed income scheme.

Currently, the government offers several small saving options like the National Saving Certificate, public provident fund, monthly income schemes, post office recurring deposit, 8 per cent savings (taxable) bond, 6.5 per cent savings (tax-free) bond and Kisan Vikas Patra. These are expected to be consolidated into 4-5 schemes.

However, a move by a Reserve Bank of India committee to get the government to lower interest rates on small savings and on the employees’ provident fund has come up against a political wall as most constituents of the Congress-led coalition are against such a measure.

At the same time, the demand for raising the interest rates by Left trade unions will be ignored.

The finance ministry does want to introduce bonds that offer protection against inflation. These will have returns linked to the rate of inflation (currently running around 5 per cent), which means the money paid back on maturity will be the principal invested plus returns based on how steeply prices have risen during the period, thus protecting the original value of the investment.

These bonds are being designed for pensioners and others with fixed income. The BJP-led government had also promised similar bonds and named them dada-dadi bonds but could not make them a reality.

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