Assured returns besieged by rationalisation: That statement perhaps best sums up what happened in the assured return schemes segment in 2005. While our prediction for 2005 was on similar lines, the method of rationalisation certainly took us by surprise.

Conventionally, announcements related to changes in small savings schemes have been made in the budget. While this year's budget contained no unpleasant surprises in the form of rate cuts, the surprise was the omission of Section 80L.

Interest earnings from avenues like fixed deposits, National Savings Certificate and Post Office Monthly Income Scheme were eligible for deduction under the aforementioned section until the last budget.

Consequent to the omission of Section 80L, returns from these schemes have become taxable thereby adversely impacting their attractiveness.

Notifications were passed whereby, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family.

As a result, going forward, only individuals can invest in these schemes. Since reducing returns on these schemes can be a touchy issue, authorities seem to have adopted a rather inconspicuous method to rationalise the segment.

The intention is clear -- reduce the fiscal burden caused by small savings schemes by preventing a significant portion of the investor community from investing in them.

Subscribers to the Employees' Provident Fund found themselves on the receiving end as well. The recommended rate for contributions to EPF was reduced from 9.5% to 8.5% for the year 2005-06.

What investors can expect in 2006

Rationalisation (read toned down benefits and less attractive returns) has always been frowned upon. However there is a need to look at the same in a positive manner. Schemes whose returns are not aligned with market returns tend to become unsustainable over longer time frames.

The measures undertaken in recent times will enhance feasibility of the schemes over the long-term. Hence they should be welcomed.

The finance minister while presenting the Budget 2005-06 has proposed adopting the exempt-exempt-taxed (EET) method of taxation for tax-saving instruments instead of the present exempt-exempt-exempt (EEE) method. Under the EEE method of taxation, contributions, earnings and withdrawals from specified schemes are exempt from tax.

Conversely, under the EET (exempt-exempt-taxed) method, while contributions and earning would continue to be exempt, the withdrawals/benefits would be taxed. A committee has been set up to work out a roadmap for moving towards the EET system and to examine the instruments that would qualify for the new regime. If implemented, the EET method of taxation will take the sheen off all investments that benefit from the EEE provision.

We believe that the rationalisation process is an irreversible one. The era of attractive assured returns coupled with tax sops will become a thing of the past for most (if not all) investors. We reiterate our view -- the new mantra will be to take on a commensurate degree of risk if attractive returns are to be clocked.

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