Government attaches great importance to promoting small savings. Small savings schemes are safe and secure avenues for keeping the savings of citizens, especially in semi-urban and rural areas. It is also important that the interest rates applicable to small savings schemes should be comparable to the interest rates that are available on other savings instruments of comparable maturity.

Among the small savings schemes, the Five Year Post Office Time Deposit Account and the Senior Citizens Savings Scheme have proved to be popular. The Post Office Monthly Income Account (POMIA) Scheme is also popular.

There has been a demand from different sections of the people for restoring the element of bonus on POMIA. There has also been a demand that the Five Year Post Office Time Deposit Account and the Senior Citizens Savings Scheme should enjoy the same tax treatment as is applicable to five year bank deposits.

Government has examined these requests in consultation with the State Governments. Last month, Government invited the Finance Ministers of State Governments to send their responses to certain specific proposals. These responses have since been received and have been examined carefully.

Government is happy to announce the following decisions:-

(i) the benefit of Section 80C of the Income Tax Act, 1961 will be extended to investments under:

(a) Five Year Post Office Time Deposit Account;

(b) Senior Citizens Savings Scheme.

The benefit of the deduction shall be available in respect of investments made under these schemes with effect from 1.4.2007 (i.e.. Financial Year 2007-08)

(ii) The bonus at the rate of 5 per cent will be payable on the deposits made under Post Office Monthly Income Account (POMIA) Scheme upon maturity of the deposit. This benefit will be available on investments made under POMIA in respect of new accounts opened under the Scheme on or after 8th December 2007. Together with bonus, the effective yield will be 8.9 per cent as against 8.3 per cent presently available under the Scheme. The return of 8.9 per cent compares very favourably with the return on bank deposits or Government securities of comparable maturity.

Tax deduction eligibility extended to post office time deposits and senior savings; monthly income account now gets a maturity bonus. Investments in the Five Year Post Office Time Deposit Account and the Senior Citizens Savings Scheme are made eligible for deduction under the relevant income tax deduction provision from 1 April 2007. A bonus of five per cent will be payable on Post Office Monthly Income Account deposits upon maturity for new accounts opened on or after 8 December 2007, increasing the scheme's effective yield and enhancing its competitiveness with comparable bank deposits and government securities.