Govt restores bonus on post-office scheme at 5%

The Government has extended the benefit of Section 80 C of the Income Tax Act, 1961...

The Government has extended the benefit of Section 80 C of the Income Tax Act, 1961, to all the investments under five-year post office time deposit account and senior citizens savings scheme. While restoring the bonus element, the Government has reduced it from ten per cent, before it was scrapped, to five per cent on maturity of deposits made under post office monthly income account (POMIA).

The benefit of the deduction under Section 80C, which is Rs 1 lakh, will be available in respect of investments made under five-year post office time deposit account and senior citizens savings scheme with effect from April 1, 2007. The bonus benefit under POMIA will be available to new accounts opened under the scheme on or after December 8, 2007.

The move is to encourage small savings, especially among the semi-urban and rural populace and spur investments. It will also make small savings instruments comparable with other savings instruments from tax and return points of view. Currently, household savings are pegged at over 30 per cent of GDP. “It is also important that the interest rates applicable to small savings schemes should be comparable to the interest rates that are available on other savings instruments of comparable maturity,” the statement said.

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Senior citizen savings scheme and post office time deposit account were so far taxable instruments. Until now, both the income invested as well as the interest earned, were taxed. After the current notification, the income at the time of investment would qualify for a deduction of up to Rs 1 lakh under Section 80 C. However, the maturity proceeds would still be taxable. Only the five-year term deposits account for a tax benefit under the benefit of Section 80 C.

Senior citizen savings scheme is currently earning a fixed return of 9 per cent while five-year post office time deposit is earning 7.5 per cent.

The post office monthly income account does not enjoy any tax benefits but now, with a five per cent bonus on maturity, the effective yield of POMIA would increase from 8.3 per cent to 8.9 per cent. “The return of 8.9 per cent compares favourably with the return on bank deposits or government securities of comparable maturity”, said the statement.