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Drastic cut in provident fund proposed

BS Bureau

The Budget presented in Parliament on Wednesday proposes to drastically reduce the interest rate on general provident fund (GPF) deposits by 1.5 per cent with effect from April 1, 2001 bringing them to a level of 9.5 per cent from the current rate of 11 per cent.

The cut, following a reduction in bank rate earlier this month, is part of the government's strategy to bring down interest rates and spur investments.

"We examined the rates of interest payable on provident fund deposits and found that in the 80s, the rates were generally 3-4 per cent higher than the prevailing inflation rate. In the last few years, the difference has been in the region of 6-8 per cent so we decided to rationalise them," said finance minister Yashwant Sinha in his Budget speech.

The high cost of capital due to high interest rates has been a limiting factor for the growth of the economy, but the cut is expected to spur investments, Sinha added.

"The cut in GPF and PF (provident fund) deposits would reduce the burden on the states. In addition, their borrowing costs would go down by 100 to 150 basis points and the quantum of devolution would increase by about Rs 9 billion. We hope that with this, the fiscal situation of the states would improve," Sinha said. He added that government guarantees on these provident fund schemes would continue.

Central government employees joining service after October 1, 2001 will be covered by a new pension system based on defined contribution.

Sinha also stated that a high-level government committee would go into the existing scheme of pensions and come out with recommendations for a new system.

However, the budget speech was silent on allowing private players to enter pension funds. That was one of the major initiatives expected in the Budget this year.

A new insurance scheme to take care of the financial security needs of workers who lose their jobs will be announced by June to provide compensation up to 30 per cent of last drawn annual pay for a period of one year, Sinha said.

The new policy, called 'Ashraya Bima Yojana', would be administered by the four government-owned general insurance companies on a 'no profit, no loss' basis and details would be announced by June.

Tax concessions on premia paid to Life Insurance Corporation (LIC) for its schemes would also apply to private sector insurance companies approved by Insurance Regulatory and Development Authority IRDA. These companies have recently started offering their products to the public.

On tax deduction at source (TDS) on interest earned on savings instruments like National Savings Scheme (NSC), Sinha said the limit of Rs 5000 interest income for application of TDS would be reduced to Rs 2500 to widen the tax base.

Source: Business Standard

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