New income-tax regime: Small savings schemes likely to take a hit

Especially, PPF may see a sharp decline in inflows

The government is anticipating reduced receipts from small savings schemes, with a growing number of taxpayers shifting to the new personal income tax regime that has eliminated the tax benefits associated with certain investments.

“In the current financial year (FY25), the inflows to small savings schemes, particularly public provident fund (PPF), may take a massive hit,” a government source told Business Standard.
 

In FY24, over 70 per cent of taxpayers opted for the new tax regime. This figure is expected to rise as the government has enhanced the new regime’s appeal by adjusting tax slabs and increasing the standard deduction.     

The Budget Estimates for FY25 show a moderate downward projection of Rs 50,000 crore in small savings receipts, from Rs 14.77 trillion in the Interim Budget to Rs 14.2 trillion in the July Full Budget.

 

For PPF, Budget Estimates have also been slightly reduced to Rs 1.77 trillion in the July Full Budget, from Rs 1.79 trillion in the Interim Budget.

According to the latest data from the Reserve Bank of India (RBI), PPF receipts have already experienced a decline between April 2023 and February 2024.

The government source noted that other schemes, such as the Sukanya Samriddhi Account (SSA) and National Savings Certificate (NSC), are also witnessing reduced inflows. However, specific data on these inflows were not disclosed.

“In my view, the reasons may be similar to those affecting bank deposits, namely declining real rates of return after accounting for inflation,” said Sudhir Kapadia, senior advisor at EY.

This phenomenon coincides with a robust increase in individual investments in mutual funds, reflecting investor confidence in initiatives to accelerate economic growth, Kapadia explained.

The government employs a mix of cash balance withdrawals, small savings collections, and bond market borrowings to finance its fiscal deficit.

The subscriber base for small savings schemes is over 400 million, encompassing 12 instruments, including NSC, PPF, SSA, and Kisan Vikas Patra (KVP). NSC, SSA, and PPF are among the schemes offering tax benefits.

"This is but natural and will work in favour of the government. Today, market borrowings are cheaper than the National Small Savings Fund (NSSF) as any withdrawal from this fund will be 50 basis points higher than the average cost. Hence, this could be a motivation to move all to the new tax regime,” said Madan Sabnavis, chief economist at Bank of Baroda.

The government has announced that it will not alter the interest rates for small savings schemes for the July-September 2024 quarter. This decision implies that the current rates will remain in effect during this period.

“The rates of interest on various small savings schemes for the second quarter of 2024-25, starting from July 2024 and ending on September 30, 2024, shall remain unchanged from those notified for the first quarter (April 1, 2024 to June 30, 2024) of 2024-25,” the finance ministry stated in a press release on June 28.