Special Deposit Scheme (SDS)

Long term savings representing non-government social security investments like provident funds, superannuation and gratuity funds, and surplus funds of government-owned institutions like The Life Insurance Corporation (LIC), GIC, UTI and Employees' State Insurance Corporation, etc are retained in deposit accounts for indefinite periods, i.e for longer durations of more than 10 years and even upto 30 years. In order to provide better returns on such savings, which ultimately belong to the common public at large, Government of India launched the Special Deposit Scheme (SDS) on July 1, 1975. The scheme is operated through various public sector banks (PSU banks) and the Reserve Bank of India (RBI) offices. On maturity, the amount under the scheme is payable in five equated yearly installments from the date of maturity.

When the scheme was launched, the rate of interest offered was 10% per annum. Subsequently, on April 1, 1983 this was raised by one percentage point to 11%, and by another percentage point to 12% on April 1, 1986. It remained unchanged for almost 15 years after that, i,e upto 2001. Subsequently, it was reduced to 9% and in April '03, the interest rate was further reduced to 8% in line with the rate cut for all small savings instruments.

The minimum investment prescription under the scheme for non-government PFs etc was initially fixed at a maximum of 20% of the net accretions. This was raised to 70% in January 1993. Thereafter, it was reduced to 55% in May 1994, 30% in May 1995 and 20% in September 1996. And from March 1997, no fresh deposits are allowed under the scheme

Initially, the scheme was supposed to be only for 10 years. However, subsequently it was extended for another 10 years in 1985, three years in 1995 and for a further five years in 1998. The government stopped accepting fresh deposits in the SDS since April 1997. Re-investment of interest earned on the SDS was also not allowed after June 2003 Government intended to phase out the scheme on account of its high cost of maintenance in the year 2003. But was forced to keep on hold the proposal. But the Government partially paid back outstanding deposits of LIC/GIC and their subsidiaries amounting to Rs.3000 Crores out of the total corpus of the Scheme at Rs.121,000 Crores. Recently the Finance Ministry has asked these institutions to withdraw their existing contributions in SDS by September 30 this year. It has also made it clear that the assured return of 8 per cent per annum that it has been paying on their funds parked in the scheme would not be available to them from October 1, 2004

After repaying the deposits of LIC/GIC/UTI etc/ government had proposed to phase out the remaining scheme through a combination of payout in cash to the smaller provident funds and by issuing securities at market-linked rates to the larger provident funds, including the Employees' Provident Fund Organisation. However, given that this issue is quite politically sensitive, the finance ministry was forced to defer the proposal last year. It has been able to peg the interest burden at the current level, first by not accepting fresh deposits nd secondly by not accepting reinvestment of yearly interest in the SDS account.