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Suresh Krishnamurthy

THE non-tax saving investment options among small savings schemes are still attractive, even after the change in yields. The Post Office Monthly Income Scheme (POMIS) offers a yield to maturity of 10.7 per cent after the drop in interest rates. In contrast, ICICI's Monthly Income Bond, which was open for subscription until March 2, offered a yield of 9.4 per cent. The yields on bank term deposits are also much lower — between 8 and 10 per cent.

Similarly, Kisan Vikas Patra offers 9.5 per cent now, while ICICI's Money Multiplier Bond offered 9.7 per cent. It is highly likely that the yield on the next ICICI offer would be revised downwards. In addition, the Government Relief Bond offers 11.4 per cent on a pre-tax basis for investors in the 30 per cent tax bracket. None of the competing instruments offers yields as high.

Importantly, this is vis-à-vis to the yields on competing instruments before the Budget. There is a strong likelihood that their yields will fall further. In fact, the chiefs of many public sector banking companies have alluded to a 50 basis-point cut in deposit and lending rates. Also, the RBI Governor, Dr Bimal Jalan, had said earlier that he would consider changes in the bank rate after the Budget. If the bank rate is cut further, there will be even greater justification for the yields on competing instruments to decline. If they do, the non-tax-saving options in the small savings bouquet will become even more attractive. In this backdrop, investors can continue to patronise such small-savings schemes for at least one more year.

However, it is also likely that the attractiveness of the schemes will vanish next year. With the rates linked to yields on government securities, the fall in interest rate will be sharper. The yields may then become more aligned with that of competing instruments.

Different ball-game: The case with tax planning schemes is different though. Shorter-term investment options offered by ICICI and IDBI are attractive even now. Most investors may prefer to invest in shorter-term instruments as the amount can be re-invested in tax saving instruments much earlier. Thus, the amount locked in such instruments can be kept to a minimum.If the interest rate on Tax Saving Bonds offered by these institutions falls by 50 basis points, the yield to maturity on these instruments would be around 12.7 per cent assuming a tax rebate of 10 per cent. However, considering the financial health of these two institutions, investors would do well to keep a check on their exposures.

This apart, there are single-premium insurance options, such as Bima Nivesh of LIC and Sukhjeevan of SBI that are now relatively more attractive compared to NSS and NSC. This is because the receipts from insurance products are tax-free at the time of redemption. In PPF, the changing yields each year are a strong negative factor, considering that the investment is locked for the next 15 years. As such, instead of investing in PPF, other options can be explored.

Tax planning still lucrative: The reduction in tax rebate to 10 per cent for investors in the Rs 60,000-1,50,000 bracket has sparked a debate on whether investors should seek tax-planning options at all. But the returns on tax saving options are still much higher than from the non-tax saving schemes.

For instance, the yield to maturity on a three-year tax saving scheme is 12.7 per cent, while a non-tax saving option returns 8.25 per cent.

Similarly, from a six-year tax savings scheme, the yield is around 12 per cent (for insurance products such as Bima Nivesh).

In contrast, a six-year non-tax saving scheme offers 10.7 per cent at the maximum, and 9.5 per cent in most cases.

The yields on tax saving options may have declined but their premium over non-tax saving products is still significant.

Thus, there is good reason to continue with tax planning for now. Considering the possibility that tax saving options may no longer exist after a few years, it makes even more sense to consider investing in them this year.

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