Research before you buy a Stock

Everyone who advises about investments  preaches that investors should do adequate research before they spend their hard-earned money on a stock. Unfortunately, this has been hard to do, at least till recently. By and large, Indian companies are stingy with information and the inputs that investors need to select, reject or monitor a stock are hard to come by in a convenient package.

Now, Value Research has launched a website which is much useful  to those who seek the data.

 It gives the longest history of the stock price to insider trades, key ratios, detailed annual and quarterly financials, links to news, articles and opinion about the stock, and much more about each stock means that whatever you need.

All you need to do is to type in a few characters of a company's name in the  site’s  search box, and click on the name that pops up.

What is the company, and what's happening with it?
At the basic level, if you know nothing about a stock, you could just look at the sector and the industry name that are given at the top. However, you'll probably need some more subjective information than just that--and a roundup of news and events. For that turn first to the 'Review and Analysis' section, which has Value Research articles of relevance to the stocks, and then to 'News & Announcements', which are the company's own releases to the stock exchanges.

How has the stock price been doing?
At the top of the page is the latest snapshot of the price, along with key numbers like PE ratio, market capitalisation, high-lows and related numbers. The price graph on the stock page is the most comprehensive one that you will find. Not only can you look at the stock in isolation, you can also compare it to indices and other stocks. By using the search box given, you can add any stock. Add the facility to zoom down to any date range, there's nothing else to be learned about how has the stock been doing on the markets.

How have the stocks key ratios progressed?
For a very quick overview that sums up many aspects of how a company is doing, there are few better options than taking a close look at five years' worth of the three most crucial ratios of Revenue per Share, Earnings per Share, and Return on Networth. Accompanying these graphs, are tables of key financial growth numbers under 'Annual Ratios' and 'Interim Growth Ratios'. These give a numerical overview of how Sales, Profits, EPS and margins have progressed.

Who else invests in the stock?
Take a look at how mutual funds have been treating the stock. This can be done in a unique table of which asset management companies have invested in the stock, and how the level of this investment have progressed over the last couple of years.

How does the company compare to its peers?
For seven key numbers, both financial and stock-related, there is  a comparison with selected peer stocks. This provides a quick overview of where similar listed companies are in comparison to the stock you are studying.

How are the companies' financials?
Of course, far above every other piece of information about a stock lies the importance of the financials. Understanding financial numbers as well as their changes is the heart of stock selection. There is an  in-depth view of financials, annual as well as quarterly, consolidated as well as standalone, for up to six years, as well as trailing twelve months. With 59 heads of information across eight periods, this is an excellent tool to assess the  depth of financial data.

Who Owns the Company?
Have the promoters been pulling out? How much do DIIs or FIIs own? Broad shareholding pattern for five years shows you who's in, who's out, and where they're going.

What is the company's own view of its prospects?
Of all the information that an investor should absorb, the director's report is the most widely ignored one. Granted, this document will try to put a positive spin on everything, but even knowing what spin is being put on can be of great value to investors.

Selecting a tax-saving fund

This  article specifically looks at equity linked savings schemes, or ELSS, which are diversified equity funds that offer a tax benefit under Section 80C. All tax saving products have a lock-in period and this one is no exception. However, it is only three years, which is perfectly acceptable considering that investments in the stock market must anyway have a long time frame.

Here's what to keep in mind when scouting for an ELSS:

• Keep performance in perspective

As with any fund investment, when narrowing down on a pick, an error investors are prone to make is opting for the most recent chart topper. Despite the bold disclaimers about past performance not necessarily being sustained in the future, investors have a hard time resisting that lure. And when that is employed as a sole parameter, it’s not uncommon for disillusionment to set in rapidly.

Let’s say in 2008 investors rushed to invest in Taurus Tax Shield. The reason being the fund was the best performer in its category in 2007 with a return of 112%, way ahead of the average 57%. Had investors done their homework, they would have noticed the fund’s abysmal performance in 2006. And, unfortunately, the fund has not put up an impressive performance since.

Or take Principal Tax Savings. It was the best fund in its category in 2012. But a smart investor would have checked past performance to realise that it underperformed the category average over the prior four calendar years.

When looking at performance, don’t get swayed by a sporadic burst in numbers. Check for consistency matters. To cite an example, Axis Long Term Equity has been fairly consistent in its performance. Over the past six years, even if it has not always been the best performer (which is an impossible feat), it has always beaten the category average and landed in the top quartile.

Some investors may find that consistency does not really  matter and they are willing to ride it rough. Reliance Tax Saver is an example. The fund was the second best in its category in 2012, leaving the category average way behind. The very next year it slipped down and underperformed the category average only to again bounce back to the No. 2 slot in 2014. But again it slumped and delivered -4.34% in 2015 when the category average was 3.20%. However, the 5-year annualized returns of 14.57% has ensured that investors are well rewarded.

Look under the hood

Once you get past performance, take a good look at the fund's portfolio.

Do remember, these are actively managed diversified equity funds with a tax break. That gives the fund manager complete leeway on what must comprise his portfolio. One fund’s mandate will not be the same as the other. Mirae Asset Tax Saver has around 72% of its portfolio in large caps, HSBC Tax Saver has around 34% in mid and small caps, and Edelweiss ELSS has 44% of its portfolio in mid and small caps. You need to figure out the kind of exposure you are looking for.

If you are looking for a mid-cap fund, then search for a tax-saving fund which has such exposure to smaller fare. If you prefer playing it safe with large caps, then search for such portfolios accordingly.

On similar lines, check whether the fund manager takes big bets or prefers going with a diversified portfolio, and see where your comfort level lies.

For example, the top 10 stocks in JM Tax Gain corner over 51% of the portfolio. The portfolio is completely invested in around 30 stocks. Edelweiss ELSS has just around 32% of its portfolio in the top 10 stocks but sports a portfolio of around 64 stocks.

You also need to look at other aspects. For instance, DSP BlackRock Tax Saver was managed by Apoorva Shah. Last year, he relinquished his role as fund manager. So if investors were investing in that fund based on him being at the helm, they might want to revisit their fund preference.

When Morningstar analysts rate a fund, they follow the 5Ps guidelines: People (caliber and experience of the fund managers and the backing of a research team), Process (does the fund manager stick to his stated mandate and declared investment process), Parent (quality of the AMC and does it keep investors' interest in mind), Performance (long term returns and consistency through market cycles), and Price (expense ratio). You too could keep these factors in mind when scouting for a fund.

When finally investing....

Like any actively managed diversified equity fund, we suggest that the best way to invest in a tax saving fund is via a systematic investment plan, or SIP. This way, you consistently enter the market in an organized fashion irrespective of the state of the market. Unfortunately, if you have delayed your tax planning, then you have no choice but to invest it all in one go now.

As with any equity investment, don’t look at a short-term horizon, especially if you have invested a lump sum. Agreed, you have a time horizon of three years which is forced upon you. But if the market is down at that time, hold on and don’t be too eager to sell. Exit only when the market picks up.

A holistic tax planning

The deadline is fast approaching. If you, as a taxpayer, have still not done your tax planning, you really don't have much time left.

A recent article in the Economic Times cited data from Computer Age Management Services (CAMS) which pointed out that just 15% of the total inflows into ELSS funds comes through SIPs.

The article also pointed out data from the Association of Mutual Funds in India (AMFI) indicating that nearly 50% of the total inflows into the ELSS category happen in the last three months of the financial year, with March dominating.

These are some of the mistakes investors make when they leave tax planning to the last minute. Instead of opting for the more convenient and desirable systematic investing plan, or SIP, they invest at one go which is a risky way to invest in the equity market. Equity linked savings schemes, or ELSS, are actively managed diversified equity funds that provided a tax break under Section 80C. But the tax break is secondary. Primarily, they are equity investments and it is always wise to opt for the SIP route.

Another area investors are prone to commit errors is opting for life insurance schemes arbitrarily since the premium paid gets a tax break under Section 80C. As a result they are saddled with more policies than required and most of these policies give the agent a good commission and are not at all suited to the investor concerned.

Here’s how to get smart about your tax planning.

Step I – Look at outflows.

Before you look at any investments, check the outflows that qualify for a deduction under Section 80C.

If you are a salaried employee, calculate the amount that is already exhausted under the Employees’ Provident Fund, or EPF. This is a forced contribution from your salary to your provident fund. Subtract the amount the employer has deducted from Rs 1.50 lakh.

Now look at the education expenses of your child. These expenses can avail of a tax break under Section 80C. The fees are for a maximum of two children and for full-time courses at a recognised institution within India.

Thirdly, look at your home loan. The principal paid towards a home loan, up to Rs 1.50 lakh, can be claimed as a deduction.

If you are paying any premium towards life insurance policies, then this too will qualify for a deduction under Section 80C.

Chances are a number of you would have exhausted your limit under Section 80C if all the above are taken into account. But even if they are, it would be wise to still open a PPF account.

Step II – Now look at investments.

If you already have a Public Provident Fund, or PPF, then give this priority and invest in the account. This is a good long-term savings tool. You can invest up to Rs 1,50,000 in a year. But if that amount is way too much, fret not. The minimum is just Rs 500. So once you open a PPF account, it is very easy to maintain it despite the time frame being 15 years.

If you are starting out as an investor and have no investments at all, consider an ELSS. That way you start your equity exposure, which is a smart move when you are young, as well as do your tax planning.

However, since maintaining a PPF account does not put a stress on your savings, you can manage both.

Step III – Check life insurance.

If you have dependents, you must have a life insurance policy to provide for them should any calamity occur. If you already have a policy in place, then skip this step. Don’t simply take out polices for the sake of it.

Just remember…

Always think of tax planning as a financial exercise. Never view it in isolation from the rest of your portfolio and always from an investment point of view. Ask yourself: Does it fit well with your overall financial goals? For instance, PPF is an excellent retirement savings tool. An investment in NSC is great if you are saving for a specific goal and need the money within 5-6 years. If your portfolio is packed with fixed income instruments and you have no equity exposure, then consider a tax-saving fund, or ELSS.

Good tax management can go a long way toward enhancing your portfolio’s return and saving tax. But the decisions need to be made in conjunction with your overall portfolio and not in an ad hoc fashion.

Guide to Section 80 Deductions

For financial year 2014-15 (with changes listed for FY 2015-16)

Deductions on Section 80C, 80CCC & 80CCD

Section 80C

The deduction under section 80C is allowed from your Gross Total Income. These are available to an Individual or a HUF. The deduction is allowed for various investments, expenses and payments.

Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000 for the financial year 2014-15 (assessment year 2015-16). The limit for financial year 2015-16 is also Rs 1,50,000.

1. Investments in PPF – Under the PPF scheme, Rs 1,50,000 is allowed to be invested in one financial year. The minimum investment required is Rs 500. Interest earned on PPF account is tax free. The PPF account matures after 15 years. Receipts on Maturity or withdrawals are tax free. Money is allowed to be withdrawn after 5 years. Contribution to PPF for individual can be in the name of the assessee, the spouse or any child. For a HUF, it can be in the name of any member of the family
2. Employee's share of PF Contribution – Amount deducted from your salary as your contribution in Employee's Provident Fund Scheme or Recognized Provident Fund.
3. Purchase of NSCs – National Savings Certificate e.g. NSC VIII issue and IX issue are eligible for deduction in the year of purchase. These can be bought from designated Post Office. Accrued Interest (which is considered reinvested) qualifies for deduction during the term of the NSCs (except the last year).
4. Life Insurance Premium Payment - The policy must be in the assessee's or spouse's or any child's name (child may be dependent/independent, minor/major, or married/unmarried). For a HUF, it may be on life of any member of HUF. The 80C deduction is valid on insurance policies purchased after 1st April, 2012 only if the premium is less than 10% of sum assured. Benefits for existing purchased policies continue. The deduction is also allowed on payments made by Government employees to Central Govt Employees Insurance Scheme.
5. Children's Tuition Fee Payment - Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full time education of any two children (including payments for play school, pre nursery and nursery).
6. Principal Repayments on Loan for purchase of House Property - Payments of installments or part payments or repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the assessee. However, if the property is transferred before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount of deduction of income so allowed for various years shall be liable to tax in that year.
7. Investment in Sukanya Samridhi account - A maximum of Rs 1,50,000 can be deposited in the Sukanya Samridhi Account for a girl child. The amount deposited shall earn an interest of 9.1% (for financial year 2014-15). This interest is fully exempt from tax. A minimum of Rs 1,000 must be deposited in a year. Receipts on maturity from the account are tax free.
8. ULIPS or Unit Linked Insurance Plan – ULIPS sold with life insurance cover for deduction under section 80C. Includes Contribution to Unit Linked Insurance Plan of LIC Mutual Fund e.g. Dhanraksha 1989 and contribution to Other Unit Linked Insurance Plan of UTI.
9. Investment in ELSS - ELSS or Equity Linked Savings Scheme is an Equity Fund. ELSS funds are eligible to be claimed as a deduction under section 80C. These funds have a 3 year lock in period.
10. Sum paid for securing Deferred Annuity - Sum paid under non commutable deferred annuity for an individual on the life of the assessee, spouse or any child. Also allowed on sum deducted from salary payable to Govt. Servant for securing deferred annuity for self-spouse or child. Payment limited to 20% of salary.
11. Sum deposited in Five Year Deposit Scheme in Post Office.
12. Amount deposited under Senior Citizens Saving Scheme.
13. Subscription to any notified securities/notified deposits scheme. e.g. NSS
14. Contribution to notified Pension Fund set up by Mutual Fund or UTI.
15. Sum paid as subscription to Home Loan Account Scheme of the National Housing Bank or contribution to any notified deposit scheme/pension fund set up by National Housing Bank.
16. Subscription to deposit scheme of a public sector, company engaged in providing housing finance (public deposit scheme of HUDCO).
17. Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara and Jeevan Akshay) or Units of UTI / notified Mutual Funds.
18. Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions.
19. Subscription to any notified bonds of NABARD (National Bank for Agriculture and Rural Development).

Section 80CCC: Deduction in respect of Premium Paid for Annuity Plan of LIC or Other Insurer

This section provides deduction to an Individual for any amount paid or deposited in any annuity plan of LIC or any other insurer for receiving pension from a fund referred to in Section 10(23AAB).

In case the annuity is surrendered before the date of its maturity, the surrender value is taxable in the year of receipt.

Section 80CCD: Deduction in respect of Contribution to Pension Account

For FY 2014-15 (assessment year 2015-16)

Total Deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1,50,000.

For FY 2015-16 (assessment year 2016-17)

A new section 80CCD(1B) has been introduced to provide for additional deduction for amount contributed to NPS of up to Rs 50,000.

Therefore for financial year 2015-16, Total Deduction under Section 80C, 80CCC, 80CCD(1) and 80 CCD(1B) cannot exceed Rs 2,00,000.

From assessment year 2012-13, employer's contribution under section 80CCD(2) towards NPS is outside the monetary ceiling mentioned above.

Deductions on Savings Bank Account

Section 80 TTA: Deduction from gross total income with respect to any Income by way of Interest on Savings account

Deduction from gross total income of an individual or HUF, up to a maximum of Rs. 10,000/-, in respect of interest on deposits in savings account with a bank, co-operative society or post office. Section 80TTA deduction is not available on interest income from fixed deposits.

Deductions on House Rent

Section 80GG: Deduction with respect to House Rent Paid

• This deduction is available for rent paid when HRA is not received. Assessee or his spouse or minor child should not own residential accommodation at the place of employment.
• Assessee should not be in receipt of house rent allowance.
• He should not have self occupied residential premises in any other place.

Deduction available is the least of

1. Rent paid minus 10% of total income
2. Rs. 2000/- per month
3. 25% of total income

Deductions on Loan for Higher Studies

Section 80E: Deduction with respect to Interest on Loan for Higher Studies

Deduction in respect of interest on loan taken for pursuing higher education. This loan is taken for higher education for the assessee, spouse or children or for a student for whom the assessee is a legal guardian.

Deduction for First Time Home Owners

Section 80EE: Deductions on Home Loan Interest for First Time Home Owners

This section provided deduction on the Home Loan Interest paid and is valid for financial years 2013-14 & 2014-15 (Assessment year 2014-15 and 2015-16) only. The deduction under this section is available only to Individuals for first house purchased where the value of the house is Rs 40lakhs or less and loan taken for the house is Rs 25lakhs or less. And the Loan has been sanctioned between 01.04.2013 to 31.03.2014. The total deduction allowed under this section is Rs 1,00,000.

Deductions on Rajiv Gandhi Equity Saving Scheme (RGESS)

Section 80CCG: Rajiv Gandhi Equity Saving Scheme (RGESS)

The Rajiv Gandhi Equity Saving Scheme (RGESS) was launched after the 2012 Budget. Investors whose gross total income is less than Rs. 12 lakhs can invest in this scheme. Upon fulfillment of conditions laid down in the section, the deduction is lower of - 50% of amount invested in equity shares or Rs 25,000.

Deductions on Medical Insurance

Section 80D: Deduction in respect of Medical Insurance

For financial year 2014-15 - Deduction is available up to Rs. 15,000/- to an assessee for insurance of self, spouse and dependent children. If individual or spouse is more than 60 years old the deduction available is Rs 20,000. An additional deduction for insurance of parents (father or mother or both) is available to the extent of Rs. 15,000/- if less than 60 years old and Rs 20,000 if parents are more than 60 years old. Therefore, the maximum deduction available under this section is to the extent of Rs. 40,000/-. (From AY 2013-14, within the existing limit a deduction of up to Rs. 5,000 for preventive health check-up is available).

For financial year 2015-16 – Deduction is raised from Rs 15,000 to Rs 25,000. The deduction for senior citizens is raised from Rs 20,000 to Rs 30,000. For uninsured super senior citizens (more than 80 years old) medical expenditure incurred up to Rs 30,000 shall be allowed as a deduction under section 80D. However, total deduction for health insurance premium and medical expenses for parents shall be limited to Rs 30,000.

Deductions on Medical Expenditure for a Handicapped Relative

Section 80DD: Deduction in respect of Rehabilitation of Handicapped Dependent Relative

Deduction is available on:

1. expenditure incurred on medical treatment, (including nursing), training and rehabilitation of handicapped dependent relative
2. Payment or deposit to specified scheme for maintenance of dependent handicapped relative.

Where disability is 40% or more but less than 80% - fixed deduction of Rs 50,000. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,00,000.A certificate of disability is required from prescribed medical authority.

Note: A person with 'severe disability' means a person with 80% or more of one or more disabilities as outlined in section 56(4) of the 'Persons with disabilities (Equal opportunities, protection of rights and full participation)' Act.

For financial year 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

Deductions on Medical Expenditure on Self or Dependent Relative

Section 80DDB: Deduction in respect of Medical Expenditure on Self or Dependent Relative

A deduction to the extent of Rs. 40,000/- or the amount actually paid, whichever is less is available for expenditure actually incurred by resident assessee on himself or dependent relative for medical treatment of specified disease or ailment. The diseases have been specified in Rule 11DD. A certificate in form 10 I is to be furnished by the assessee from any Registered Doctor.

In case of senior citizen the deduction can be claimed up to Rs 60,000 or amount actually paid, whichever is less.

For financial year 2015-16 – for very senior citizens Rs 80,000 is the maximum deduction that can be claimed.

Deductions on Person suffering from Physical Disability

Section 80U: Deduction with respect to Person suffering from Physical Disability

Deduction of Rs. 50,000/- to an individual who suffers from a physical disability (including blindness) or mental retardation. Further, if the individual is a person with severe disability, deduction of Rs. 100,000/- shall be available u/s 80U. Certificate should be obtained from a Govt. Doctor. The relevant rule is Rule 11D.

For financial year 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

Deduction for donations towards Social Causes

Section 80G: Deduction for donations towards Social Causes

The various donations specified in Sec. 80G are eligible for deduction up to either 100% or 50% with or without restriction as provided in Sec. 80G. 80G deduction not applicable in case donation is done in form of cash for amount over Rs 10,000.

Donations with 100% deduction without any qualifying limit:

• National Defence Fund set up by the Central Government
• Prime Minister's National Relief Fund
• National Foundation for Communal Harmony
• An approved university/educational institution of National eminence
• Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of that district
• Fund set up by a State Government for the medical relief to the poor
• National Illness Assistance Fund
• National Blood Transfusion Council or to any State Blood Transfusion Council
• National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities
• National Sports Fund
• National Cultural Fund
• Fund for Technology Development and Application
• National Children's Fund
• Chief Minister's Relief Fund or Lieutenant Governor's Relief Fund with respect to any State or Union Territory
• the Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central Welfare Fund, Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996
• The Maharashtra Chief Minister's Relief Fund during October 1, 1993 and October 6,1993
• Chief Minister's Earthquake Relief Fund, Maharashtra
• Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat
• Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims of earthquake in Gujarat (contribution made during January 26, 2001 and September 30, 2001) or
• Prime Minister's Armenia Earthquake Relief Fund
• Africa (Public Contributions — India) Fund
• Swachh Bharat Kosh (applicable from financial year 2014-15)
• Clean Ganga Fund (applicable from financial year 2014-15)
• National Fund for Control of Drug Abuse (applicable from financial year 2015-16)

Donations with 50% deduction without any qualifying limit.

• Jawaharlal Nehru Memorial Fund
• Prime Minister's Drought Relief Fund
• Indira Gandhi Memorial Trust
• The Rajiv Gandhi Foundation

Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total income

• Government or any approved local authority, institution or association to be utilised for the purpose of promoting family planning
• Donation by a Company to the Indian Olympic Association or to any other notified association or institution established in India for the development of infrastructure for sports and games in India or the sponsorship of sports and games in India.

Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total income

• Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
• Government or any local authority to be utilised for any charitable purpose other than the purpose of promoting family planning
• Any authority constituted in India for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or both
• Any corporation referred in Section 10(26BB) for promoting interest of minority community
• For repairs or renovation of any notified temple, mosque, gurudwara, church or other place.

Deductions on Contribution by Companies to Political Parties

Section 80GGB: Deduction in respect of contributions given by companies to Political Parties

Deduction is allowed to an Indian company for amount contributed by it to any political party or an electoral trust. Deduction is allowed for contribution done by any way other than cash.

Political party means any political party registered under section 29A of the Representation of the People Act. Contribution is defined as per section 293A of the Companies Act, 1956.

Deductions on Contribution by Individuals to Political Parties

Section 80GGC: Deduction in respect of contributions given by any person to Political Parties

Deduction is allowed to an assessee for any amount contributed to any political party or an electoral trust. Deduction is allowed for contribution done by any way other than cash.

Political party means any political party registered under section 29A of the Representation of the People Act.

Deductions on Income by way of Royalty of a Patent

Section 80RRB: Deduction with respect to any Income by way of Royalty of a Patent

Deduction in respect of any income by way of royalty is respect of a patent registered on or after 01.04.2003 under the Patents Act 1970 shall be available up to Rs. 3 lacs or the income received, whichever is less. The assessee must be an individual resident of India who is a patentee. The assessee must furnish a certificate in the prescribed form duly signed by the prescribed authority.

Deductions on Investment in Long Term Infrastructure Bonds [REMOVED]

Section 80CCF: Investment in Long Term Infrastructure Bonds

This section is no longer valid from AY 2012-13.

Returns on small saving schemes to fall

The five-year recurring deposits, one-year, two-year and three-year term deposits will stand to lose their interest rate advantage

  

Returns on small saving schemes like Kisan Vikas Patra, National Savings Certificate to fall from April 1

Interest rates on popular small savings such as Kisan Vikas Patra, National Savings Certificate and post office recurring deposit schemes are set to come down from April 1 as the government rearranges  the interest rate framework for these schemes to align it with market rates.

Interest rates of these schemes will now be reset every quarter as part of this rearrangement , a finance ministry statement said on Tuesday.
"This is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes," it said, explaining the rationale behind this move.

Sukanya Samriddhi Yojana , senior citizen savings scheme and the monthly income scheme that enjoy interest rate and spread over the G-sec (1)rate of comparable maturity that is of 75 basis points, (2)100 bps and 25 bps respectively have been left untouched by the government.

Spread of 25 bps that long term instruments, such as the five-year term deposit, five-year National Saving Certificates and Public Provident Fund (PPF) currently enjoy over G-Secs of comparable maturity have also been left untouched as these schemes are particularly relevant to the self-employed professional and salaried classes, it added.

The five-year recurring deposits, and one-year, two-year and three-year term deposits, however, will stand to lose their interest rate advantage with the government removing the 25 bps spread over G-sec of similar maturity from April 1, 2016.

"The interest rates of all small saving schemes would be recalibrated w.e.f. 1.4.2016 on a quarterly basis as given under, to align the small saving interest rates with the market rates of the relevant government securities," the statement said, adding that small savings interest rates are perceived to limit the banking sector's ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India.

The government has decided to allow for premature closure of PPF accounts in cases such as that of  serious ailment, higher education of children, This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening, it said.

The weighted average yield of dated G-secs was 7.94% in April-September 2015 compared with 8.81% in the first half of the preceding year, potentially opening up the possibility of an up to 1% point reduction in the small savings rate.

Issue of higher interest rates on small savings schemes impacting monetary transmission had been flagged by the RBI to the government.

Banks had also raised the issue at the pre-budget consultations held with finance minister .

(1)  Government security (G-Sec) means a security created and issued by the Government for the purpose of raising a public loan or any other purpose as notified by the Government in the Official Gazette 

(2)  In financial terms, 'one'  Basis Point is a unit  equivalent to  0.01% i.e. 1/100th of a percent.     Thus 10 bps means 0.10% and   100 bps means 1%.    BPs is mostly used to indicate the changes in interest rates and also bond yields.   .