Reduction of period of holding Monthly Income Scheme (MIS) and National Savings Certificate (NSC) from 6 years to 5 years for new subscribers would have no additional tax implications.
There is no tax deduction for MIS under Sec. 80C and interest income is taxable. NSC, however, will continue to qualify for deduction under Sec. 80C, while interest will be taxable.
But it is conceded by the Board Circular No. 405 dated January 15, 1985 (1985) 151 ITR (St.) 48, that the interest accretion for each year (as indicated in the certificate) can be treated as reinvestment in the same NSC, so that interest which has to be offered for tax can be claimed as deduction under Sec. 80C, subject to the overall ceiling of Rs.1 lakh under Sec. 80C along with other savings. Presumably the new ten-year NSC will also qualify for deduction under Sec. 80C, if notified, with the same treatment for interest.
The ceiling for investment in Public Provident Fund (PPF) will be increased from Rs.70,000 to Rs.1 lakh, but overall ceiling under Sec. 80C at Rs.1 lakh will remain the same.
Savings in PPF will continue to have an edge over other forms of savings, since interest will be tax free.
The amount of interest retained in the Fund will, however, not qualify for deduction under Sec. 80C, unlike what is conceded for NSC.
Post Office Time Deposit Schemes now permit earlier withdrawal with lesser damage. There is no relief for deposits, while interest is chargeable to tax. These changes are, therefore, tax-neutral. Increase in interest rate for Post Office Savings Account (POSA) from 3.5 per cent to 4 per cent should be welcome. Interest was once exempt, but tax exemption was diluted by Notification No.32/2011 dated June 3, 2011, with effect from the same date, with the total exemption being replaced by limiting the exemption to Rs.3,500 per annum for individuals and Rs.7,000 per annum for joint account.
It may be pointed that many of the postal savings schemes, except for schemes such as Post Office Cash and Deposit Certificates and Postal Cumulative Time Deposit are not now in vogue.
It is regrettable that commission for agents will be abolished, except for Mahila Pradhan Kshetria Bachat Scheme. Commission agents have played a significant role as intermediaries at normal cost.
This is a retrograde step, since it is bound to make a dent on the collections.
The impact of the new 10-year instrument proposed to be issued cannot be gauged. If it is notified, it will qualify for deduction under Sec. 80C with treatment on a par with NSC with interest being taxable.
Direct Taxes Code Bill, 2010, if it becomes law, will not improve matters, as the ceiling for savings is proposed to be reduced. There is a case for more liberal tax treatment for small savings not only to benefit taxpayers at the lowest tax bracket but also for mobilising savings, while encouraging thrift.