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Posting Bonus

With the POMIS reinstating its bonus, it has come back in preference with investors, a move that will affect other tax saving schemes. All such schemes have their own advantages. We take a look at them

Tax saving avenues are available to Indian investors in various forms: POMIS, SCSS, Mutual Funds, NSC and PPF.

You certainly cannot take your investors for granted. This is what the government has realised concerning its small saving schemes.

In February 2006, the post office monthly income scheme (POMIS), scrapped the 10 per cent bonus that was given as the end of its six year term. Investor interest was promptly hit and they began to move towards bank fixed deposits where they could get around 9 per cent for a year.

Now, effective December 8, 2007, the government has reinstated the bonus though with a lower rate, to attract the investors again. The POMIS will now have a 5 per cent bonus, in addition to the 8 per cent per annum interest. The move would affect the banks which would now try and offer higher interest rates to retain their customers.

There is also some change on the tax benefit front. Two schemes -
Senior Citizens Savings Scheme (SCSS) which earns 9 per cent and the five-year postal fixed deposits - will now be treated at par with five year bank fixed deposits in terms of tax exemptions. So investments under these two schemes would be eligible for tax exemption under section 80C of the Income Tax Act with retrospective effect from April 1, 2007.

The main drawback is the post-tax return. The interest income from POMIS, SCSS, National Savings Certificate (NSC) and other postal savings is added to the taxable income while computing taxes. This reduces the overall yield of these products. For instance, the NSC return is 8.16 per cent (annual) which is reduced to just 5.66 per cent for a person who falls in the 30 per cent tax bracket.

This is where Public Provident Fund (PPF) is a clear winner. Its biggest benefit is that it still falls under the EEE (exempt-exempt-exempt) method for taxation of savings. What this implies is that the contribution to the scheme is exempt from tax, accumulation of interest is exempt from tax and withdrawals from the scheme are exempt too. Though the 15 year lock-in period is a hindrance, there is a facility of partial withdrawal after six years and loan facility from the third year.

Mutual funds too have a very efficient tax saving avenue called equity linked savings schemes (ELSS). With the lowest lock-in period of just three years, they rank highest on the liquidity front. Investments in ELSS are eligible for deduction under Section 80C. On maturity, after three years, there is no tax payable.

Though as a whole, ELSS have always managed to generate superior returns when compared to the other tax saving instruments, investors prefer postal savings for the assured returns that is available without any associated risks. Of course, the 9 per cent SCSS with the additional tax exemption under Section 80C is particularly attractive to senior citizens and retired individuals.