Small Savings Schemes: How DTC May Alter Their Taxability

The government recently introduced a few reforms in small-savings schemes with a view to making them more flexible and market-aligned. Investors should understand tax concessions available on these schemes under the Income Tax Act, 1961 as well as the proposed Direct Taxes Code 2010 (DTC).

Public Provident Fund

The amount invested in PPF is deductible under Section 80C of the Act, subject to overall limit of R1 lakh per financial year (FY). Also, the interest and withdrawal from this account are tax-free. The concessions continue to be available under DTC, too. The recent increase in the interest rate from 8% to 8.6% and increase in annual investment ceiling from R70,000 to R1 lakh may, thus, generate more tax-free income for the taxpayer.

National Savings Certificates

Investment in NSC is eligible for deduction under Section 80C, subject to an overall limit of R1 lakh per FY. The interest accrued on NSC, though taxable, also qualifies for deduction under Section 80C of the Act as it is reinvested (except in maturity year). The reduction of maturity period of NSC from six years to five and the introduction of a 10-year NSC, may boost investment in this scheme. However, note that DTC provides for no concessions on NSC.

Post Office Time Deposit

The investment amount in a five-year deposit is deductible under Section 80C of the Act, while the interest earned is taxable. The deduction, however, does not currently feature in the DTC.

Post Office Savings Account

Interest income of R3,500 (in a single account) and R7,000 (in a joint account) from this account, is exempt from tax under Section 10 (15). While the rate of interest in this account has now been increased from current 3.5% to 4%, the tax exemption under the Act continues in current form. Also, the DTC does not offer the tax exemption.

Post Office RD/MIS

A few other investment schemes offered are the five-year recurring deposits (RD) and monthly income schemes (MIS). While the government has reduced the maturity period of MIS from six years to five, no tax concessions are available to these schemes under either the I-T Act or the DTC.

Senior Citizens Savings Scheme

The initial investment in this scheme is deductible under Section 80C of the Act, subject to overall limit of R1 lakh per FY. Interest from this scheme is taxable and TDS is applicable if interest exceeds R10,000 per annum. Currently, the DTC does not offer any concessions with on this scheme. 

Financial Express, New Delhi, 06-12-2011