On the 10th of August 2022, the Ministry of Finance announced, ” any citizen who is or has been an income-tax payer, shall not be eligible to join APY from 1st October 2022″. Further, “In case a subscriber, who joined on or after 1st October 2022, is subsequently found to have been an income-tax payer on or before the date of application, the APY account shall be closed, and the accumulated pension wealth till date would be given to the subscriber.” A concerned reader wanted to know if the same rule is possible in the case of PPF, SSY (Sukanya Samriddhi Yojana) or any other small saving scheme.
Atal Pension scheme was meant for the lower-income unorganised sector who usually did not have access to a pension scheme like EPF or NPS. The maximum pension eligible is Rs. 5000 per month. This pension is unlikely to be sufficient for anyone in the taxable bracket today.
So the move to exclude tax-paying assessees from the APY is excellent. Benefits will reach those who need them most, not those who don’t. Now, will the same kind of ruling also be extended to other small saving schemes?
We can only speculate. There are two sides to the story. On the one side, governments should reduce their borrowing and provide benefits only to lower-income segments. The taxation of the EPF scheme beyond Rs. 2.5 lakh contributions is another such move.
On the other side, NSSF, the National Small Savings Fund (where PPF, SSY, SCSS, NSC, KVP, MIS, TD, and PO-SB contributions go) is a huge safety reservoir for the government that stabilises our economy and system, as noted by the economic survey of India in the past.
So a balance between debt and borrowing for governance is essential. Sooner than later, we should be ready for a situation where small saving schemes are only eligible for the lower-income segment. This will allow the government to keep the interest rate high for those who do not have much of an investible surplus to take on capital market risk via mutual funds.
The following is our opinion:
- The senior citizen savings schemes will not be impacted.
- PPF is also unlikely to see such a rule change immediately. However, now that the finance ministry has implemented the new tax regime, it can simply lower the tax slabs suitably for all and eliminate section 80C without any “loss” to taxpayers. It could then limit the maximum PPF contribution to much lower than the present Rs 1.5 lakhs. This will also “encourage” those with an invisible surplus to seek a more suitable asset allocation.
- The Sukanya Samriddhi Yojana is meant only for girl children born in lower-income households. It offers such families an incentive to educate their children and not marry them young. We believe at least those in the 20% tax slab and above must be excluded from this scheme and expect the ministry to act on this soon.
- The majority of EPF subscribers belong to the 0% or 5% tax slabs. If the EPF is made optional to those in the higher tax slabs, then they are free to invest elsewhere. Those who are contributing more than Rs. 2.5 lakh can also avoid this tax (if subscriptions are made optional). This will allow the ministry to keep the interest rate higher than the benchmark yield and pay interest on time. The fiscal stability of the EPFO (currently fragile) will strengthen.
- Similar arguments also apply to other small saving schemes like monthly income schemes, time deposits etc.
Alternatively, taxpayers need not be excluded from any scheme. The rate offered to those in the 0% or 5% slab can be fixed and higher than the benchmark yield. The rate for those in the higher slabs can accurately track bond yields. This will lower the debt outgo of the government without angering dominant voting demographics.
In summary, we believe that the exclusion of tax-payers from the Atal Pension Yojana is a step in the right direction. Investors should also expect similar rulings (tax slab-based interest rate if not outright exclusion) for other small savings schemes. As our economy grows, we should expect the government only to protect those who need such protection. Those who earn well (relatively) will have to fend for themselves.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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