In a bid to remove the existing ambiguities owing to multiple Acts and rules as well as to make small saving schemes more attractive, the Modi government has in the Union Budget 2018 proposed merger of the Government Savings Certificates Act, 1959 and the Public Provident Fund Act, 1968 with the Government Savings Banks Act, 1873. The move is aimed at making the various small saving schemes simpler and more flexible for investors.
The good news is that besides ensuring the existing benefits, certain new benefits to the depositors have been proposed under the bill. For instance, the existing Acts are silent about grievance redressal. However, the amended Act allows the government to put in place a mechanism for redressal of grievances, and an amicable and expeditious settlement of disputes relating to small savings. Similarly, investments can also be made by the guardian on behalf of minors.
Apart from getting a wide applause, the proposal, however, has also created scepticism in the mind of many investors about what will happen to their existing and future PPF (Public Provident Fund) investments, and whether they are safe or not. Keeping this in view, the Ministry of Finance, in a press release issued on Tuesday, said, “All existing protections have been retained while consolidating PPF Act under the proposed Government Savings Promotion Act. No existing benefits to depositors are proposed to be taken away through this process.”
The Ministry has also made it clear that “the existing and future depositors will continue to enjoy protection from the attachment under the amended umbrella Act as well.
Financial experts say that with the proposal to revoke the Public Provident Fund Act, 1968, PPF will henceforth fall under the purview of the Government Savings Bank Act, 1873, and be somewhat like other post office schemes such as Post Office Savings Account, Senior Citizen Savings Scheme etc.
To put it simply, “revoking the PPF Act does not have any impact on the interest rate, taxability and most importantly, the safety with respect to our invested money. The only impact it will have is that currently PPF enjoys freedom from the court attachment (not income tax) with respect to any debt or liability incurred by the investor. However, the change will be applicable only to new investors. The balance accumulated so far shall continue to enjoy the guarantee with respect to court attachment,” says Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in.
According to financial experts, currently, different small savings schemes are governed by different laws such as the Public Provident Fund Act, 1968, the Government Savings Certificate Act, 1959, and the Government Savings Bank Act, 1873. Some of them are antiquated and some of their provisions are redundant today.
“The government’s Budget proposal is aimed at bringing all of them under one umbrella law. The provisions of the Act simplify several matters such as norms for premature closure of small saving schemes and allowing guardians to deposit funds on behalf of minors in all schemes. The government intends to retain all the existing protections under the PPF Act while consolidating it with the Government Savings Promotion Act. This includes the clause on protection from being attached. At the same time, premature closure terms and conditions will be simplified. The funds of the investors are and will continue to remain safe,” says Adhil Shetty, CEO, Bankbazaar.com.
Premature Closure of Schemes
Among the proposed benefits in the new bill, the government also wants to make provisions for the premature closure of all small savings schemes so that investors could utilize them to the most. For example, as per the existing PPF Act, a PPF account can not be closed before the completion of 5 financial years, even if someone wants to do so. However, the benefits of premature closure of small savings schemes may now be introduced to deal with medical emergencies, higher education needs, etc, which will make these schemes more attractive.
“While it is true that PPF accounts are meant for long-term capital creation, giving options for partial or complete withdrawal on specific emergencies is a good idea. Under normal circumstances this would remain a long-term capital creation instrument as early redemption is only possible on certain contingencies. Giving options on early foreclosure, on specific adverse circumstances, will only increase the attractiveness of this instrument for investors,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
However, while you may now be allowed by the government for premature closure of your PPF account – even before five years – it is in your own interest not to do so. Experts say that PPF is still one of the best investment options in India, which can help you generate a good corpus over its term of 15 years, which can be extended within one year of maturity for further 5 years and so on. Besides, contribution to a PPF account, interest and maturity proceeds all are tax free. Thus, it is good for generating your retirement nest egg also. Therefore, premature closure of PPF accounts should be avoided.
“The government is aiming to provide premature closure of small savings schemes in specific situations. In my view, however, this may prove fatal to your savings habits. What this provision says indirectly is that you bring your own discipline and we will be less liable for paying long-term interest in case of small savings schemes. The lower flexibility has worked well for many investors and they were able to accumulate a good corpus through small savings schemes especially for children. Now with the flexibility to close the account earlier, what has happened in case of EPF will start happening here too. Not many people will continue the account till its maturity in case the need of funds arises. This may further reduce the level of household savings as not many people invest in equity markets in India, nor do they understand debt instruments fully,” says Jitendra P S Solanki, MCSI, CTEP, and CFP.