The government is likely to offer returns of about 8.5 per cent on the Dada-Dadi bonds (bonds for senior citizens) announced by Finance Minister Jaswant Singh in January this year.

According to government sources, the Rakesh Mohan committee on small savings, which met last week in Mumbai, discussed the issue of interest rate and taxability on the Dada-Dadi bonds.

While the interest rate could be 8.5 per cent, no decision had yet been taken on the taxability issue, they said.

Singh had announced that the Dada-Dadi bonds would offer a rate of return that was higher than that offered by the market.

At present, small savings instruments offer an interest rate of 8 per cent. The RBI Relief Bonds are available in two variants, 6.5 per cent tax-free bonds and 8 per cent taxable bonds.

The sources said the Dada-Dadi bonds would be benchmarked to the interest rate on small savings instruments.

When asked if the returns would be the same as that offered by the Life Insurance Corporation's Varishtha Bima Yojana, the sources said this scheme was an aberration. LIC's Varishta Bima Yojana offers 9 per cent annualised returns.

The sources also said the Rakesh Mohan committee was scheduled to meet again in the last week of March. The details of the Dada-Dadi bonds would be announced by April 1, they said.

The committee would also prune the number of small savings schemes and categorise them in a manner that would cater to particular income levels.

A committee, headed by Reserve Bank of India Governor YV Reddy, which was previously looking into small savings, had recommended that the interest rate on small savings should be aligned to the average yield on government borrowings in the secondary market.

It had also said tax incentives should be withdrawn for short and medium term instruments with a maturity of less than six years.

The sources said investment preferences had changed in the last 2-3 years. Provident funds do not attract as much investor interest as the monthly income plans of post offices. Hence, there was a need to revisit the entire issue of small savings, they said.