Analysing the Sukanya Samriddhi Yojana, tax-free infra bonds and the gold monetisation scheme introduced in the latest Budget
16-Apr-2015 •Aarati Krishnan
The personal tax proposals in the Budget may have disappointed most investors as neither the hike in the Section 80C limit nor the increase in the basic tax exemption limits came through. However, there are three proposals that may open up new investment avenues for individuals. Specifically, there are three new savings options that investors may find attractive.
Sukanya Samriddhi Scheme
The Sukanya Samriddhi Yojana, a post office scheme meant to help parents save for their daughter's future, was flagged off a few weeks before by the Centre. The Budget has notified the 80C and other tax exemptions on the scheme, effective from April 1, 2015.
The scheme can be opened by the parent on behalf of a girl child who is less than 11 years old. Minimum deposits start at Rs 1,000, going up to Rs 1.5 lakh a year. Annual deposits have to be made for 14 continuous years and the account will mature in 21 years. Investments in the scheme are eligible for deduction under Section 80C of the IT act. The interest earned, which is at 9.1 per cent compounded yearly, is also exempt from tax. While premature withdrawal from the scheme is barred, partial withdrawal is allowed when your child turns 18. Full withdrawal ahead of time is allowed if your daughter gets married.
Pros and cons: With a 9.1 per cent interest and that too tax-free, the scheme now offers the highest return among post office options. The 80C exemption granted in the Budget lifts the effective post-tax returns. The scheme's structure is fairly simple and allows substantial annual investments (Rs 1.5 lakh), which can make a material difference to your child's portfolio.
The biggest negative is the lack of liquidity and exceptionally long tenure. To really avail of the maturity proceeds under this scheme, you have to start very early, preferably within months of your child being born. The interest rates notified for this year are attractive. But like all other post office schemes, the rates will be reset on April 1 every year, based on the g-sec ten-year yields for the preceding year. It is likely that the rates fall over the next few years as market interest rates decline.
Overall, the scheme scores over traditional insurance plans, term deposits or other small savings schemes that people usually use to park their child's portfolio. But if you really have 21 years to go before your daughter needs an education corpus, balanced funds or equity funds will deliver much better returns. If you are risk-averse, you can use a 60:40 combination of this scheme and equity funds to make your own child fund.
Tax-free bonds to finance infrastructure projects proved to be an excellent option for investors a couple of years ago. But the issuances abruptly stopped when the notification expired. Now FM Jaitley has promised to reinstate tax-free bonds to fund road, rail and irrigation projects in his Budget.
Tax-free bonds, which are issued by public sector entities, raise money for investing in long-term infrastructure projects. They usually offer tenures of 10, 15 and 20 years. They need to be rated by a credit rating agency, can be electronically held and are traded on the BSE or NSE after issue. The interest rates, which are pegged to the prevailing g-sec rates are tax -free in the investor's hands.
Pros and cons: Indian investors have hardly any truly long-term options for their fixed income portfolio today. Tax-free bonds are an excellent fit here as you have safety and certainty of interest payments over a 10-20 year term. This enables you to plan the other components of your fixed income portfolio very easily. The tax-free nature of these bonds makes the post-tax returns quite reasonable in comparison to avenues like bank deposits and small savings schemes (except PPF and Sukanya Samriddhi). Liquidity through secondary market is available too. In fact, this feature has enabled holders of older tax-free bonds to make hefty capital gains during the recent fall in interest rates.
If tax-free bonds make a comeback, they will remain good long-term options for investors, particularly those in the 20 or 30 per cent tax brackets. You should now expect their interest rates to be lower, given that ten-year g-sec yields, which hovered at 8.5-9 per cent during the last tranche of tax-free bonds, are now at 7.7 per cent. With falling inflation, the dip in rates should not be a worry as you will still earn quite a decent real return on these bonds.
For investors who prefer very low risk with their fixed income, these bonds score over gilt or income mutual funds which tend to suffer a fair degree of volatility through interest rate cycles. Returns on MFs are also taxable as capital gains after indexation. But the only flip side of tax-free bonds (in their earlier avatar at least) is that they deprive you of the benefits of compounding. The interest is paid out every year and you may fail to reinvest it at attractive rates.
Gold monetisation schemes
The Budget has announced two new types of gold monetisation schemes, to be flagged off later. One is a gold deposit scheme and the other is gold bond. The modalities of these are yet to be notified. However, going by the recommendations of an earlier committee (KUB Rao Committee) constituted by the RBI on this issue, the scheme could take the following forms.
Gold-linked bonds: These are securities issued by a bank or a market player which allow investors to capture gold price fluctuations along with a regular yield from the instrument. Such bonds, internationally, do not hold physical gold but divide their investments between gold derivatives and debt instruments. The former captures gold price gains or losses while the latter provides the regular interest component. Returns from such bonds, though they may loosely replicate gold returns and save you the trouble of owning gold in physical form, are not likely to be high.
Gold deposit schemes: A few Indian banks have already been operating gold deposit schemes. Tweaks to these schemes may now be coming to make them more attractive. Under the earlier avatar, gold deposit schemes (such as the one from SBI) allowed you to deposit jewellery or coins in physical form with the bank. The bank would melt and assay it and accept the 'deposit' based on the final value of the gold so obtained. It would make deductions for low purity and wastage. The deposit would earn interest at a nominal rate of 0.75 to 1 per cent a year based on the value of the gold held in the deposit every year. At the end of the deposit term of three, four or five years, investors could receive their deposit back in the physical form or in cash. The minimum deposit size was 500 grams.
The scheme wasn't very popular with investors given that it was offered by a very few banks and branches, had a high minimum threshold of 500 grams and paid minimal interest. The scheme may be reintroduced with tweaks to these features to make it more investor friendly.
While not a great investment avenue, gold deposits may be a good way to earn some return on your jewellery holdings instead of letting them idle away in the bank locker (where you pay hefty rentals too!).