Small savings schemes such as the Public Provident Fund and tax-free bonds, on which subsidies add up to about ₹12,000 crore annually, should be taxable at the time of withdrawal, the Economic Survey recommends.

Arvind Subramanian’s suggestion comes on the heels of the Finance Ministry’s announcement of a cut in the interest rate regime for some small savings schemes by about 25 basis points from April 1.

Arguing that the term “small savings” is misleading, the Survey said tax deductions were in fact availed of by the super rich and not the middle- and low-income groups.

“In 2013-14, the average income in the 30 per cent tax threshold was ₹24.7 lakh,” it said, with 25 lakh taxpayers in the group. Similarly, 54 lakh income earners were in the 20 per cent tax bracket.

Reasonably well-off taxpayers with an income of over ₹4 lakh annually invest in these schemes, it said after analysing the tax deductions under Section 80C of the Income Tax Act and data from the State Bank of India. “Roughly 62 per cent of total 80C deductions in FY 2013-14 were accounted for by taxpayers with gross taxable income over ₹4 lakh… These individuals are at the 97.3rd and 98.4th percentiles of the income distribution respectively — hardly ‘small’,” it said.

Similarly, when the deduction limit under Section 80C was increased by ₹50,000 in 2014-15, there was almost a one-to-one increase in claims for those in the 20 and 30 per cent tax brackets.

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