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QUESTIONS & ANSWERS
NSS, 1987: a second look is warranted
You have rightly pointed out (in your column in The Hindu July 30, 2007) that NSS 1987 was closed with effect from April 1, 1992. Will you kindly indicate what the present position is about amounts contributed and interest earned in accounts under this scheme? Are withdrawals from the accounts still liable to be treated as taxable income for the year concerned? If so, is it fair because the amounts have been impounded for 15 to 20 years and the rate of interest has been steadily coming down, the latest on this very long-term deposit being just 7.5 per cent. Should not at least senior citizens be permitted to close the accounts either as one-time payment or over a limited period without attracting tax liability?
The hardship caused to the investors in National Savings Scheme, 1987 (which was in vogue till 1992), by taxing the entire amount in lumpsum during the year on lumpsum withdrawal or on closure has been indicated in these columns even earlier. Persons with no liability in respect of their annual income would be taxed, because of the lumpsum receipt. There is no spread-over benefit as it existed for interest before assessment year (AY) 1998-99 and continues to exist for arrears of salary under Sec. 89. It is also true that the Government has been unilaterally reducing the interest from the scheme year to year, so that it has had the benefit of funds at lower rate of interest over the past many years. The scheme was framed on the principle Exempt, Exempt, Tax (EET), which is now intended to be extended to other deductions.
The principle is to allow the principal amount as a deduction, but tax the interest and the return of principal (ETT), but this has been deferred.
The number of continuing subscribers for NSS, 1987, has been dwindling each year either on death or closure. Even in continuing accounts, there have been substantive withdrawals consequent on the benefit of higher interest from other investments. The suggestion for the return of the amounts without tax to those, who have retained the accounts for a minimum period of 20 years, should be accepted. In fact, all such accounts could be closed compulsorily by return without tax. If this suggestion is not acceptable, such return without tax may be considered, at least for senior citizens.
Or return may be staggered or substituted by other bonds. The loss of revenue by exempting return of the present holdings may not be significant. The suggestion of Professor C. T. Kurien, the Economist, should therefore, deserve serious consideration.
Meanwhile, the only respite is Board Circular No. 532 dated March 17, 1989 (1989) 176 ITR (St.) 327, which has recognised that the drawings on the death of the account-holder would not be taxable in the hands of the legal heirs, since such amount would have the character of a capital receipt in their hands.
S. RAJARATNAM
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