The post office is trying hard to woo back small investors. Banks have weaned away a chunk of post office customers with higher interest rates on fixed deposits.

In a notification last month, the finance ministry has raised the investment limit for individuals in post office monthly income scheme to Rs 4.5 lakh from Rs 3 lakh earlier.

The 50 per cent hike in the investment limit is also applicable to joint accounts. A maximum of Rs 9 lakh can be kept in an MIS account held jointly by two; for three persons jointly holding an account, the maximum investment can be Rs 13.5 lakh.

“We hope this will encourage people to invest in the scheme once again,” an official release said.

Not good enough

However, just an increase in the deposit limit without any change in the interest rate will not bring back the scheme’s popularity.

The post office monthly income scheme lost its popularity after the withdrawal of the 10 per cent bonus by the government from February 13, 2006. The 10 per cent bonus on maturity after six years would have fetched a 9.67 per cent annual return from the scheme.

This made MIS a more attractive option, especially for retired people and pensioners, compared with bank fixed deposits that offered an 8 per cent interest for maturities above five years till 2005.

Bank bounty

From the end of 2005, banks started raising their interest rates on deposits. As of July-August this year, a senior citizen could have earned a 10 per cent interest per annum on his/her fixed deposit for more than a year.

Banks have started pruning their deposit rates from the 9.75 per cent that they were offering a couple of months ago. But bank fixed deposits of five years or more still give better returns than the six-year post office MIS scheme that offers an 8 per cent interest annually.

Senior citizens get an additional 0.50 percentage points more as interest in bank deposits. Even now, some banks offer as high as 10 per cent interest to senior citizens on fixed deposits of select maturity periods.

Household savings

The data released by the Reserve Bank of India shows that the household sector’s investment in government-sponsored small savings schemes went down to Rs 37,544 crore by March this year from Rs 85,106 crore two years ago. The financial savings of households in small saving schemes accounted for as much as 19.6 per cent in 2004-05. But it slipped to 4.9 per cent by the end of 2006-07.

A mere hike in the investment limit in post office MIS will not bring back its lost glory unless banks reduce interest rates on deposits.

Another advantage in bank deposits is that there is no cap on an individual’s investment limit.

However, if one holds a post office MIS account of Rs 4.5 lakh under a single holding, he/she cannot open another account in joint names in the same post office branch. He/she will have to go for a joint account to invest more than Rs 4.5 lakh in a post office monthly savings scheme.

Tedious TDS

However, some prefer the post office scheme when it comes to tax deduction on interest income. While interest income from both MIS and bank fixed deposits are taxable, TDS (tax deducted at source) is not applicable for the postal scheme. This provision helped many to open MIS accounts in bogus names and evade tax payment.

In a bank fixed deposit, one will have to submit Form 15H to stop TDS. Form 15H is a self-declaration of the depositor that he/she doesn’t have a taxable income, including interest income, and hence is not liable to pay tax. This form has to be submitted at the beginning of every financial year or the bank will deduct tax from the interest income while crediting the same to the deposit account.

However, a taxpayer must show the interest income from MIS as “other income” in his/her annual income returns and pay tax thereon. Otherwise, the interest income will become black money under tax laws.

Cash crunch

The recent government notification on MIS has another significant departure from the earlier system — one will now have to invest in multiples of Rs 1,500 against multiples of Rs 1,000 before. The government had earlier said that payments above Rs 50,000 would not be accepted in cash.

Traditionally, investments in MIS were largely made in cash. So, even if a person invested Rs 2 lakh, he/she would to get one passbook for the same.

Now, that is going to change. According to M. Sengupta, additional director (savings bank), department of post, West Bengal circle, investors will have to hold at least two passbooks for opening an MIS account of Rs 1 lakh in cash. Each passbook, he says, will account for Rs 49,500.

“However, you can have it in one passbook if you write a cheque,” Sengupta said. But, ironically, agents of post office schemes as well as post office branches usually decline to accept cheques drawn on banks of individual investors. They insist the investor puts his/her cash in a post office savings bank and draws a cheque on the account.