DOI: 10.5817/FAI2014-1-2 No. 1/2014
22
Factors Affecting Taxpayers’ Decisions in Saving Tax
by Investing in Tax Saving Bonds:
A Study in U.P. State, India
Manoj Kumar1
, Vikas Anand2
1
Victoria University College,
Department of Business Studies,
12(A), U Tun Myat Rd, Tarmwe Tsp.
Yangon, Myanmar
E-mail: mkumar75@gmail.com
2
Global Institute of Management,
Department of Financial Studies,
Amritsar, Punjab, India
E-mail: vikasanand_2001@yahoo.com
Abstract: While enabling oneself eligible for deduction from the partial or total
tax liabilities, choosing the best investment is one of the most important decisions
a taxpayer in India can make. One of the alternative investment avenues, tax
saving bonds in India is considered as an option to serve any investor with two
purposes: tax saving and investment growth with almost zero risk. Majority of the
investors in India consider investing in a financial instrument as a very critical
decision when it comes to the risks in their investments. The present study is to
explore how different attributes of a financial instrument (such as tax saving
bonds) are perceived by the investors of a province in India. Results in this study
indicate that while taxpayers continue to place too much emphasis on return from
the investment and in particular tax benefits, interact with other critical firm and
product specific attributes such as past performance, lock-in period, etc., to
influence perceptions and evaluations of tax saving bonds.
Keywords: investors, tax saving bonds, tax free bonds, India
JEL codes: G10, G11, G21, N25
Introduction
Tax saving bonds (TSBs) in India is proposed as an investment instrument to tax
payers to lessen their tax liabilities either partially or completely (subject to tax
slabs and income of the individuals in a particular financial year). These bonds are
generally issued either by the government (such as Reserve Bank of India bonds
on behalf of the Government of India) or by certain public banks (such as the
State Bank of India) and private banks (such as ICICI, IDBI, HDFC). Unlike other
tax savings instruments, tax saving bonds, unfortunately, are not very popular.
The reasons might be higher inflation rates in the country, longer mandatory
lock-in period (the minimum period for which investments are to be kept invested
in), lower effective return on investment, etc.
No. 1/2014
23
In the Indian Income Tax Act of 1961, a new section 80CCF was proposed in the
union budget of 2010. This section (80CCF) allows an individual taxpayer to
invest in Long Term Infrastructure Bond and get tax exemption of INR (short for
Indian Rupees, $1 = INR 60.00 approximately) 20,000/- per financial year. This
limit is above the current income tax section 80C limit (of INR 100,000/-) for taxexempt
benefits by investing into notified instruments.
The main purpose of proposing this new section (80CCF) in the budget was to
promote infrastructure development in the country. Looking at the growing
demand and need for better infrastructures in the country, the government
proposed that the savings made by subscribing these bonds are to be utilized for
infrastructure financing purposes.
This section (80CCF) serves mainly two purposes to investors: a) tax exemption
from the actual liabilities, and b) guaranteed return from the investment at a
fixed interest rate and for the life of the bond. By investing in these infrastructure
bonds, the investors get assured rate of returns and, usually, yield of these bonds
varies from 7.00 to 9.50% per annum. Generally, the maturity period of the
bonds varies from 10 to 15 years and the minimum lock-in period is for 5 years.
After the lock-in period, the individual investor has the option to exit from these
infrastructure bonds through either a secondary market trading or a buy back
option as specified by the bond issuer. Though, offering comparatively high
interest rates, the biggest drawback in the case of infrastructure bonds is that the
interests earned are taxable in the hands of investors and the hurdle of the lockin
period, etc.
The reserve Bank of India allows Foreign Institutional Investors (FIIs) to invest up
to USD 25 billion in infrastructure bonds and debentures of Indian infrastructure
companies. Since FIIs are enthusiastically participating in infrastructure
developments in India, how domestic investors and taxpayers see it from the
investment perspective as well as being part of the development is a question for
which an answer has to be found.
The main objective of this research is to explore how various attributes of TSBs
impact Taxpayers' (investors') fund evaluations (attitude) and investment
intentions.
1 Review of Literatures
Dick and Basu (1994); Gerpott et al. (2001); and Lee and Cunningham (2001)
explored the relationship between satisfied customers and firms providing
different financial products. Their studies revealed that the satisfied customers
opted to maintain their relationship with the firms in which these customers
invested and willed to continue in investing. Gordon (1991) in his study explores
the EE and HH series US savings bonds that were present at that time. He
concluded that if an investor considers the safety factor and/or the tax deferral
Financial Assets and Investing
24
feature and/or the competitive variable interest rate, then these bonds are an
investment worthy of consideration.
Singh & Chander (2004) studied the perceptions of investors towards mutual
funds and results of their study revealed that in majority five factors were critical
to investors to make an investment decision. These five critical factors were:
1. Better Investment Opportunities
2. Risk, Return and Performance of Mutual Fund (and Firm)
3. Professional Expertise of Managers of Mutual Funds
4. Benefits and Transparency in Disclosing Information
5. Listing Status (the investors expected open-ended mutual funds
should also be listed on stock exchanges like close-ended mutual
funds)
Athma and Kumar (2007) in their research on a sample of 200 respondents
tested if there was any association between Residency and Attributes of the
product. They also studied to identify the factors affecting consumers' decision in
selecting Life Insurance Products. Clark et al (2012) surveyed over 2300
participants, who were members in the defined contribution pension plan of a
London based international bank. The study predicted the significance of
retirement saving of the relation between the respondents' socioeconomic status
and risk preference. Vardhini (2012) compares both types of investment
instruments, i.e. tax saving bonds (TSBs) and tax-free bonds (TFBs), with other
debt instruments in India and concludes that post-tax yields are much superior in
TSBs and TFBs as compared to most other debt instruments. A tax saving bond is
one in which the initial investment is exempted from tax liabilities but interest
earned, during the period of holding that instrument, is not exempted from tax.
Dash & Sood (2013) explored various demographic characteristics and customers'
perceptions towards investing into various life insurance products in India. They
concluded that the life insurance company (Life Insurance Corporation, the
biggest insurer in India and the subject company in the study) has to redevelop
strategies to convince the customers to buy the insurance products as a saving
instrument or pension package.
Parasuraman, A., et al. (1985) in their exploratory research revealed several
insights and suggestions with regards to the consumers' perceptions about
service quality. Researchers concluded that there are 10 determinants that
consumers use to form perceptions about the quality. We followed their research
in developing basic framework (objectives) of our study.
In fact, there is a plethora of studies, research papers and literatures available on
investors’ attitude towards investments in Mutual Funds, Equity Linked Saving
Schemes (ELSS), Insurance and many other financial instruments but not a single
study, in the researchers’ knowledge, was conducted on Tax Saving Bonds (TSBs)
so far. Therefore, this is an opportunity to the researchers to explore empirically
No. 1/2014
25
in taxpayers’ attitude towards TSBs as an investment option and what factors are
affecting their decisions for such investments. Also, this is an opportunity for the
readers from the other geographic locations to learn about this investment
instrument in India.
2 Objectives
The purpose of the study is to explore (1) the taxpayers’ perception towards Tax
Saving Bonds (TSBs); and (2) what factors are influencing their fund evaluations
and investment intentions. Therefore, the following are the objectives formulated
for this study:
1. To explore and understand desirable attributes of TSBs.
2. To analyze investors’ perception towards TSBs as an investment option.
3. To explore the critical factors associated with TSBs which may have an
impact on investors' investment decisions.
3 Methodology
The present study is primarily based upon primary data collected by conducting a
survey using a structured questionnaire. The design of study has three sub
sections:
1. Instrument (Questionnaire) Development
2. Sample Selection, Pilot Study, Redesigning Questionnaire, Sampling
Procedures and Data Collection
3. Application of Statistical Tools (in the light of objectives of the study) for
outcomes and results.
3.1 Instrument Development
A structured questionnaire with two sections is developed as an instrument for
this study. The first section has questions to collect demographic data of the
respondents and the second section has questions to collect responses on the
different attributes of TSBs. The second section of the questionnaire comprised of
16 questions related to 16 critical attributes of TSBs for the study. All the
attributes are measured by responses on a 5-point rating Likert scale, where
rating 1 would mean Totally Disagree and rating 5 would mean Totally Agree.
Annexure 1 shows a sample of questions from section two of the questionnaire.
The surveys were conducted between June 2012 and November 2012.
3.2 Sample Selection, Sample Procedures and Data Collection
Initially, a pilot study was conducted in the Aligarh district (west region) of Uttar
Pradesh state in India and data was collected to improve the questionnaire. In the
second phase, using the convenience sampling method, 350 respondents from
the Aligarh district (225 males and 125 females) were surveyed to fill in the
questionnaire. After careful screening of data validation, out of the total response
received (267 respondents), only 254 questionnaires were found to be complete
Financial Assets and Investing
26
and suitable for the analysis. The outcomes and results of this study are based
upon 250 questionnaires that were randomly selected (71% of original
responses).
Furthermore, the guidelines below were also followed in the screening process:
a. Exclude the students, considering that they are either unemployed or do
not fall under tax payer category of Income Tax Act, 1961 of India
b. Exclude respondents with salary equal to or below INR 200,000 as there
is 100% tax exemption for incomes up to INR 200,000 as per existing
income tax laws (financial year ending 31st March, 2013) in India.
3.3 Analytical Tools
The collected data was classified, sorted, tabulated, and analyzed using statistical
tools like mean, standard deviation and correlation analysis, etc. to make the
study meaningful. To measure internal consistency of the data, Cronbach’s Alpha
test for reliability was applied. Further, to determine whether objectives of the
study are met or not, Kaiser-Meyer-Olkin (KMO) test for measure of sample
adequacy, Bartlett’s test of sphericity, and Factor Analysis for dimension
reduction were employed. All the results in this study are the outcomes of the
above tests using SPSS V.17 software (George and Mallery, 2012).
4 Limitation of the Study
The study is based upon the primary data collected through a survey conducted
on 350 tax paying respondents, who were also opting for other scheduled
investment opportunities for tax saving benefits under different sections of the
Indian Income Tax Act (1961). The results and implications of this study are
subjected to the limitations of sample size, a selected class of taxpayers, the
geographic location of respondents (only the Aligarh District in the western region
of Uttar Pradesh State of India), psychological and emotional characteristics of
surveyed population and certain imposed conditions etc.
This study can be extended onto a wider range of population in the country to
generate further useful results, which might be used by government or banks in
India for better offers/solutions while encouraging or creating more awareness
among investors.
5 Analysis of Data
The table below represents the attributes (variables) used in the study:
Attribute Notation
Risk in Investment F1
Return from Investment F2
Cost of buying Asset (Entry/Exit Load, Tax) F3
Tax Benefits from Investment F4
Fringe Benefits F5
No. 1/2014
27
Attribute Notation
Reputation of seller Firm F6
Credit Rating of TSBs F7
Past Performance of Firm F8
Expertise of Seller Firm F9
Promptness in Updating Customer F10
Services and Supports F11
Resolution of Customer Complaints F12
Early Bird Incentives F13
Transparency in Information Disclosure F14
Compulsory Lock-in Period more than 3 years F15
Liquidity in Investment F16
Source: Researchers’ primary data
5.1 Descriptive Statistics
Table 1 represents the descriptive statistics of the data collected.
Table 1 Descriptive Statistics
Attribute N Mean Std. Deviation Variance
F1 250 1.08 0.266 0.071
F2 250 4.89 0.398 0.158
F3 250 1.48 0.635 0.403
F4 250 4.94 0.245 0.060
F5 250 3.84 0.860 0.740
F6 250 4.44 0.593 0.352
F7 250 4.72 0.499 0.249
F8 250 4.76 0.428 0.183
F9 250 4.72 0.617 0.381
F10 250 4.87 0.326 0.106
F11 250 4.73 0.444 0.197
F12 250 4.80 0.360 0.129
F13 250 3.48 0.865 0.749
F14 250 4.73 0.446 0.199
F15 250 1.13 0.423 0.179
F16 250 3.74 0.600 0.360
Valid N (listwise) 250
Source: Researchers’ Primary Data
Financial Assets and Investing
28
It can be inferred from Table 1 that respondents have responded fairly against
each of the questions (attributes). The statistics reveal that the attribute “Tax
Benefits from the Investment in TSBs (mean 4.94)” is, obviously, a primary
concern to most investors followed by the attribute “Return from the Investment
(mean 4.89)” and after sales service quality of the firm i.e. “Promptness in
updating customers (mean 4.80)”. The attributes “Risk in Investments (mean
1.08)” and “Compulsory Lock-in Period more than 3 years (mean 1.13)” are of
least concerns, which is obvious for the reasons that most taxpayers do not want
to take any risk while investing in bonds and longer lock-in periods will mean that
their money will be stuck in such an investment for a much longer period.
Another attribute “Cost of Buying Assets, the TSBs (mean 1.48)” also got
negative responses, which may be due to the reason that if cost of buying goes
up, the yield on the return comes down.
5.2 Test of Reliability: Cronbach’s Alpha
In most of the survey-based studies, researchers often use summated scales to
probe underlying constructs being measured. These survey instruments may
consist of indexed responses to dichotomous or multi point questionnaires, which
are later summed to arrive at a resultant score associated with a particular
respondent in the study. Usually, developments of such scales are used to gather
predictor variables for use in objective models in further researches. Santos
(1999) argued that in most such studies, the question is raised on reliability. As
the function of scales is to encompass the realm of prediction stretches, the
reliability of data consistency becomes an issue. One of the most popular
reliability statistics in use in such studies is Cronbach's alpha (Cronbach, 1951).
Cronbach's alpha is a measure of internal consistency (i.e. how closely related a
set of items are as a group). As a rule of thumb, a high value of alpha (of 0.70 or
more) is often used as evidence that the items measure an underlying (or latent)
construct, meaning a high degree of consistency. In the present study,
Cronbach’s Alpha is found to be 0.889, which sufficiently meets the minimum
requirement to move ahead in the study (for other tests such as KMO, Barlett’s
and Factor Analysis).
5.3 Kaiser-Meyer-Olkin Test of Adequacy and Bartlett’s Test of
Sphericity
The KMO test is a measure of sampling adequacy which compares the magnitudes
of the observed correlation coefficients in relation to the magnitudes of the partial
correlation coefficients. A partial correlation measures the strength of the
relationship between any two variables (or attributes) when the other variables
(attributes) are kept constant. Generally, a large KMO value is considered a good
measure which agrees that the correlations between pairs of variables (i.e.
potential factors or attributes) can be explained by the other variables (or
No. 1/2014
29
attributes). If the KMO test results in a measure equal or below 0.5, then factor
analysis cannot be performed.
Barlett's test of sphericity (Barlett, 1950) is a test for the hypothesis that the
correlation matrix is an identity matrix (i.e. all the diagonal terms are 1 and nondiagonal
terms are zero). Basically, before applying factor analysis, what to be
determined first is whether the hypothesis that all the correlations, tested
simultaneously, are zero or significantly different from zero. In case correlations
are significantly different from zero can be rejected. To make it simple to
understand, imagine a correlation matrix where all variables (attributes) are
perfectly correlated (= 1) with oneself, and have some level of correlation with
the other variables (attributes). If the variables are not correlated with the other
variables then these variables can’t be part of the same factor.
Table 2 represents the results of Bartlett’s and KMO tests. The KMO measure of
sample adequacy is 0.837, which can be considered of higher order and a good
score to continue. Bartlett’s tests of sphericity results in a significant level of <
0.01 which is fulfilling the minimum requirement of ≤ 0.05 and a clear indication
that factor analysis can be applied on the data.
Table 2 KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.837
Bartlett's Test of Sphericity
Approx. Chi-Square 650.251
DF 120
Sig. 0.000
Source: Researchers’ Primary Data
5.4 Correlation Analysis: Test of Multicollinearity
Further, the correlation analysis is performed on the data to study the problem of
multicollinearity, which exists when two or more of the predictors in a regression
model are moderately or highly correlated. Correlation is a measure of the
association between two variables. It indicates how the value of one variable
changes with the changes in the value of the other correlated variable. A
correlation coefficient of zero means that there is no association between the
variables while a correlation coefficient of -1 would mean a perfectly inverse
correlation between variables i.e. variable will move in opposite directions with
same magnitude of changes. A correlation coefficient of +1 would mean that
correlated variables would move with same magnitude of positive changes. The
problem of multicollinearity is assumed to exist if the correlation coefficient
between two or more variables under tests is more than 0.5 and if so, the data
would require factor analysis to be performed. Table 3 represents the correlation
matrix. It can be inferred from the results that correlation coefficient between
some variables is more than 0.5 which, therefore, requires factor analysis to be
performed on the data.
Financial Assets and Investing
30
Table 3 Correlation Matrix (Source: Researcher’s Primary Data)
F1
F2
F3
F4
F5
F6
F7
F8
F9
F10
F11
F12
F13
F14
F15
F16
F1
1.000
-0.049
0.140
-0.110
-0.016
-0.162
-0.144
-0.016
-0.113
-0.080
0.105
0.037
0.119
0.107
-0.090
0.072
F2
-0.049
1.000
-0.055
0.077
-0.012
0.095
0.070
0.053
0.001
0.128
-0.003
-0.013
0.043
-0.053
0.059
0.008
F3
0.140
-0.055
1.000
-0.111
0.049
-0.190
0.052
-0.225
-0.173
-0.284
0.245
-0.013
0.036
0.293
0.032
0.113
F4
-0.110
0.077
-0.111
1.000
0.064
0.194
0.052
0.044
0.092
0.155
-0.121
-0.111
-0.137
-0.123
0.004
-0.112
F5
-0.016
-0.012
0.049
0.064
1.000
0.063
0.222
0.024
0.033
-0.085
0.053
-0.055
0.042
0.135
0.148
-0.012
F6
-0.162
0.095
-0.190
0.194
0.063
1.000
-0.104
0.212
0.266
0.274
-0.283
-0.005
-0.057
-0.244
0.152
-0.088
F7
-0.144
0.070
0.052
0.052
0.222
-0.104
1.000
-0.142
-0.256
-0.205
0.318
-0.145
-0.127
0.311
0.116
-0.009
F8
-0.016
0.053
-0.225
0.044
0.024
0.212
-0.142
1.000
0.334
0.110
-0.277
0.179
0.044
-0.238
0.176
0.166
F9
-0.113
0.001
-0.173
0.092
0.033
0.266
-0.256
0.334
1.000
0.309
-0.162
0.094
0.055
-0.209
0.129
0.107
F10
-0.080
0.128
-0.284
0.155
-0.085
0.274
-0.205
0.110
0.309
1.000
-0.168
-0.053
0.036
-0.198
0.057
-0.055
F11
0.105
-0.003
0.245
-0.121
0.053
-0.283
0.318
-0.277
-0.162
-0.168
1.000
-0.005
-0.131
0.665
0.018
-0.259
F12
0.037
-0.013
-0.013
-0.111
-0.055
-0.005
-0.145
0.179
0.094
-0.053
-0.005
1.000
0.224
0.117
0.106
0.228
F13
0.119
0.043
0.036
-0.137
0.042
-0.057
-0.127
0.044
0.055
0.036
-0.131
0.224
1.000
0.030
0.110
0.418
F14
0.107
-0.053
0.293
-0.123
0.135
-0.244
0.311
-0.238
-0.209
-0.198
0.665
0.117
0.030
1.000
0.191
0.039
F15
-0.090
0.059
0.032
0.004
0.148
0.152
0.116
0.176
0.129
0.057
0.018
0.106
0.110
0.191
1.000
0.134
F16
0.072
0.008
0.113
-0.112
-0.012
-0.088
-0.009
0.166
0.107
-0.055
-0.259
0.228
0.418
0.039
0.134
1.000
Source: Researchers’ Primary Data
No. 1/2014
31
6 Factor Analysis
In a questionnaire based survey research, the responses to each question (the
variable or attribute) represent an outcome. But sometimes many questions in
the survey are often related, this might tend to influence subject responses.
Factor analysis explains correlations among multiple outcomes as the result of
one or more underlying explanations, or factors. The process involves data
reduction, as it attempts to represent a set of variables by a smaller number.
Factor analysis takes qualitative observations against each of the variables and
resolves them into distinct patterns of occurrence. In other words, factor analysis
reduces the large number of variables in the study to a smaller number that is
capable of explaining the same variance observed in the large number of
variables.
6.1 Communalities
Communality measures the extent to which a variable correlates with all other
variables and higher values of communalities are considered better. If
communalities for a particular variable are low (say, between 0.0 and 0.5), then
that variable will struggle to load significantly on any factor. Once the extraction
of factors has been completed, the table of communalities is examined for how
much of the variance in each of the original variables is explained by the
extracted factors. Table 4 represents the results on communalities of variables
(the amount of variation extracted from each variable). In the present study, the
extraction of factors is done using the principal component analysis method.
From the table below, it can be inferred that variables “Service and Support
(0.824)”, “Transparency in information disclosure (0.781)”, and “Return from
investment (0.714)” carried the highest communalities. The table also shows
communalities for three variables below 0.50, “Risk in investment (0.281)”, “Cost
of buying Asset (0.321)”, and “Fringe Benefits (0.471)”. The communalities less
than 0.5 would mean that these variables are not explained adequately by the
factors i.e. such variables do not correspond sufficiently to any of the factors and
could thus be discarded.
Table 4 Communalities
Attribute Initial Extraction
F1 1.000 0.281
F2 1.000 0.714
F3 1.000 0.321
F4 1.000 0.596
F5 1.000 0.471
F6 1.000 0.610
F7 1.000 0.630
F8 1.000 0.558
Financial Assets and Investing
32
Attribute Initial Extraction
F9 1.000 0.553
F10 1.000 0.568
F11 1.000 0.824
F12 1.000 0.525
F13 1.000 0.581
F14 1.000 0.781
F15 1.000 0.525
F16 1.000 0.674
Extraction Method: Principal Component Analysis.
Source: Researchers’ Primary Data
6.2 Total Variance Explained
All the variables in the study are further analyzed for Eigenvalues. The Eigenvalue
for a given factor measures the variance in all the variables which is accounted
for by that factor. In other words, the Eigenvalue is the total variance explained
by each factor. Any factor that has an Eigenvalue less than one would be
disregarded because this factor does not have enough total variance explained to
represent a unique factor.
The un-rotated output in factor analysis tends to maximize the variance
accounted for by the first and subsequent factors, thus forcing the factors to be
orthogonal in factor matrix. During this stage of data compression, most variables
tend to load on the early factors and then substantially on more than one factor.
Here, rotation serves a better option by making output more understandable by
generating a pattern of loadings where variables load strongly on one factor while
loading weakly on the other subsequent factors. Rotations of loading can be
either orthogonal or oblique rotation, allowing the factors to correlate.
The most commonly used method of orthogonal rotation is Varimax Rotation,
which rotates the factor axes to maximize the variance of the loadings of a factor
in column on all the variables in rows of a factor matrix (representing the results
of differentiating the original variables by extracted factors). However, often
unrealistic assumption of orthogonality causes the Varimax Rotation to be a less
preferred method. The other option of factor rotation, Oblique method, which is
inclusive of orthogonal rotation, is rather more preferred method in factor
analysis. But in this study, the Varimax Rotation method is used.
Table 5 (below) represents the results in total variance explained by different
variables in the study. The extraction is done through the principal component
analysis and orthogonal (varimax) rotation method of rotation for factor loading.
No. 1/2014
33
Table 5 Total Variance Explained By Different Variables
Component
Initial Eigenvalues
Extraction Sums of Squared
Loadings
Rotation Sums
of Squared
Loadingsa
Total
% of
Variance
Cumulative
%
Total
% of
Variance
Cumulative
%
Total
1 2.834 17.711 17.711 2.834 17.711 17.711 2.219
2 1.914 11.960 29.671 1.914 11.960 29.671 1.848
3 1.593 9.958 39.629 1.593 9.958 39.629 1.484
4 1.148 7.175 46.805 1.148 7.175 46.805 2.247
5 1.062 6.639 53.443 1.062 6.639 53.443 1.360
6 0.990 6.190 59.633
7 0.897 5.604 65.237
8 0.860 5.376 70.613
9 0.835 5.221 75.834
10 0.772 4.824 80.659
11 0.752 4.698 85.357
12 0.619 3.870 89.226
13 0.543 3.391 92.618
14 0.506 3.165 95.782
15 0.439 2.743 98.525
16 0.236 1.475 100.000
Extraction Method: Principal Component Analysis.
a. When components are correlated, sums of squared loadings cannot be added to obtain a
total variance.
Source: Researchers’ Primary Data
From the results above in table 5, it is clearly evident that there are five variables
which have Eigenvalues more than 1.0 and the cumulative total variance
explained by these factors is 53.44%. The sorted Eigenvalue against the factor
number is graphed in the Cattell Scree Plot in the picture below (Picture 1). The
plot reckons like the side of a mountain and Scree refers to the debris falling from
that mountain and settling at the mountain's base.
The graph below exhibits that there are five factors which are more important to
taxpayers (with Eigenvalues either equal or more than 1). The rest of the factors,
though also influenced the investors in some ways or the other, are on limited
scale (below Eigenvalue 1).
Financial Assets and Investing
34
Picture 1 Screen Plot
Source: Researchers’ Primary Data
6.3 Component Matrix
The component matrix shown in Table 6 below indicates how each variable in the
analysis correlates with each of the five retained factors. The same weight is
carried by both negative and positive correlations.
Table 6 Component Matrixa
Attribute
Component
1 2 3 4 5
F1 -0.721 -0.121 0.228 0.484 0.051
F2 -0.711 0.167 0.374 0.327 0.031
F3 0.562 0.128 0.241 0.347 -0.207
F4 0.549 -0.199 0.319 0.053 -0.062
F5 0.530 0.250 0.228 0.046 -0.244
F6 0.524 -0.155 0.110 0.394 0.320
F7 -0.508 0.226 -0.039 -0.075 -0.069
F8 0.107 0.723 0.075 -0.347 0.118
F9 0.089 0.684 0.026 -0.151 0.286
F10 0.072 0.567 0.092 0.293 -0.057
F11 0.252 -0.393 0.227 -0.147 0.067
F12 0.055 0.249 0.672 0.078 -0.051
No. 1/2014
35
Attribute
Component
1 2 3 4 5
F13 -0.118 -0.017 0.511 -0.320 -0.305
F14 -0.464 -0.230 0.484 -0.345 0.092
F15 -0.204 0.302 -0.328 0.200 0.013
F16 0.120 -0.070 0.235 -0.041 0.798
Extraction Method: Principal Component Analysis.
a. 5 components extracted.
Source: Researchers’ Primary Data
Unfortunately, this solution is not as easy to interpret as the rotated solution
(rotated component matrix). But in a nutshell, we can say that this matrix
basically explains how component loadings take place for each variable prior to
rotation.
6.4 Rotated Component Matrix
The factor pattern matrix for orthogonal rotations reports the factor loadings for
each variable on the factors after rotation. Table 7 below represents the results in
rotated component matrix. This matrix basically represents how both the
variables are weighted for each factor, and the correlation between the variables
and the factor. Because there are correlations for which possible values range
from -1 to +1, the SPSS was asked to suppress (not to print) any of the
correlations that are less than 0.3 values, allowing the output to be easier to read
by removing the clutter of low correlations that, probably, are not meaningful in
the present study.
Table 7 Rotated Component Matrixa
Attribute
Component
1 2 3 4 5
F1 0.738 0.460
F2 0.581 0.327
F3 0.539 0.458
F4 0.517 0.350 0.428
F5 0.592 0.396
F6 0.852
F7 0.850
F8 0.411 0.804
F9 0.745
F10 0.513 0.461
F11 0.649
F12 0.639
Financial Assets and Investing
36
Attribute
Component
1 2 3 4 5
F13 0.390 0.311 0.443
F14 0.332 0.612
F15 0.671 0.701
F16 0.732 0.831
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization
a. Rotation converged in 8 iterations.
Source: Researchers’ Primary Data
The results in the above table show that there is only one variable load on three
factors while there are five variables load on two factors. Overall, using the
extraction method of principal component analysis and the Varimax Rotation
method with Kaiser Normalization, the factor analysis has generated five factors.
The entire rotation solution converged within 8 iterations. The component
transformation (rotated component) matrix is shown in Table 8.
6.5 Component Transformation Matrix
This matrix describes the specific rotation applied to the factor solution. Basically,
this is the matrix with which the un-rotated factor matrix is multiplied to get the
rotated factor matrix. It does not require to be interpreted. Table 8 (component
transformation matrix) represents the correlations among different extracted
factors.
Table 8 Component Transformation Matrix
Component 1 2 3 4 5
1 0.708 -0.670 0.052 -0.093 0.195
2 0.108 0.152 0.941 -0.187 -0.214
3 0.404 0.394 0.099 0.786 0.232
4 0.508 0.610 -0.253 -0.551 0.056
5 -0.256 0.041 0.197 -0.187 0.927
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
Source: Researchers’ Primary Data
Principal component analysis was the extraction method used and Varimax with
Kaiser Normalization as the rotation method used in generating the above
solution matrix.
No. 1/2014
37
7 Results and Discussion
In line to the objectives of the present study, the desirable attributes (the
variables) of TSBs were formulated and explored to understand how taxpayers,
as investors, perceive TSBs as an investment avenue while, through tax
exemptions, reducing their total tax liabilities or part of it. There were total 16
such critical attributes related to TSBs on which the study was performed. All of
these attributes weighed heavily on the taxpayer to influence their decision
towards such investments. To make the outcomes of the study more meaningful,
a statistical application of factor analysis, using SPSS, was performed on the
primary data collected through a questionnaire-based survey. The complete set of
critical attributes was then divided into five critical factors, able to represent the
multiple outcomes of the variables (the attributes). These five resulting critical
factors and the grouped variables are shown below:
Result: Factor 1
It includes the five attributes of TSBs “Expertise of Seller Firm", "Past
Performance of Firm”, “Reputation of Seller Firm”, “Promptness in Updating
Customer”, and “Resolution of Customer Complaints”. It may be inferred that
these attributes are weighing heavily on the “Selling Firm” side and hence can be
grouped (named) as “Selling Firm Factor”.
Result: Factor 2
This factor includes the two variables i.e. “Services and Supports” and
“Transparency in Information Disclosure”. Since these variables can be grouped
together into operations, services and sales supports, this factor can be renamed
as “Services and Supports Factor”
Result: Factor 3
This factor was weighed heavily by the variables “Cost of Buying Assets”, “Credit
Ratings of Tax Saving Bonds”, “Liquidity in Investment”, and “Compulsory Lock in
Period more than 3 years”. Since these variables are product specific, this factor
can be named as “Product Features Factor”.
Result: Factor 4
This factor consists of the four variables, e.g. “Fringe Benefits”, and “Early Bird
Incentives”. Since these variables can be clubbed together in a group of
additional benefits, the factor can be renamed as “Additional Benefits Factor”
Result: Factor 5
This is the last factor which represents the four variables, “Risk in Investment”,
“Tax Benefits from Investment”, and “Return from Investment”. Since all of these
Financial Assets and Investing
38
variables are investment and return benefits specific variables, this factor can be
named as “Investment Benefit Factor”.
Conclusion
The present study is an attempt to explore into the factors that affect or influence
the decisions of the taxpayers (from the Aligarh district in the West Uttar Pradesh
State of India) towards designated tax saving bonds, offered for exemption in tax
through investments. Further, an attempt is made to explore the extent to which
investors (the taxpayers) are satisfied with the different benefits offered by TSBs
offering banks and other institutions/firms.
It is observed that most taxpayers were balanced between positive and negative
attitudes. The variables, upon factor analysis, are grouped together in such a way
which results into five factors. The factors (or the variable groups) are Selling
Firm Factor, Service and Supports Factor, Product Features Factor, Additional
Benefits Factor, and Investment Benefit Factors. The firms and banks selling such
financial instruments might find the results of this study useful in order to
enhance/develop business strategies.
The results in the study reveal that attributes related to tax saving bonds such as
“Tax Benefits from the Investment in TSBs”, “Return from the Investment” and
“Promptness in updating customers” have higher means and which is obvious
because the primary concern to most investors is the benefits from the
investment and after sales service quality of the firms. The attributes “Risk in
Investments” and “Compulsory Lock-in Period more than 3 years” have lowest
means which indicate that these attributes related to the TSBs are seen
negatively by most tax payers for the reasons that, probably, the investors do not
want to take any risk in their investments in bonds and longer lock-in period will
mean that their money will be stuck in such an investment for a much longer
period. Another attribute “Cost of Buying Assets, the TSBs” is also seen as a
negative response by the respondents, which may be due to the reason that if
cost of buying goes up, the yield on the return comes down.
In future, research can be conducted in other regions/states and onto a larger
population of taxpayers to draw a bigger conclusion. Also, studies can be
conducted to find out the taxpayers’ interests in investing in various other options
available within TSBs (Infra bonds, tax free bonds etc).
The Reserve Bank of India allows Foreign Institutional Investors (FIIs) to invest
up to USD 25 billion in infrastructure bonds and debentures of Indian
infrastructure companies. Since FIIs are participating heavily in infrastructure
developments in India, how Indian investors including taxpayers see it from the
perspective of investment and also being part of development of the country is a
question for which an answer has to be found. Future research on this topic might
explore this.
No. 1/2014
39
References
Athma, P. and Kumar, R. (2007). An Explorative Study of Life Insurance Purchase
Decision Making: Influence of Product and Non-Product Factors. ICFAI Journal of
Risk & Insurance, 4(3), pp. 19-21.
Cronbach, L. J. (1951). Coefficient Alpha and the Internal Structure of Tests.
Psychometrika, 16(3), pp. 297-334. DOI: http://dx.doi.org/10.1007/BF02310555
Clark, G. L., Almond, S. and Strauss, K. (2012) The Home, Pension Savings and
Risk Aversion: Intentions of the Defined Contribution Pension Plan Participants of
a London-Based Investment Bank at the Peak of the Bubble. Urban Studies,
49(6), pp. 1251-1273. DOI: http://dx.doi.org/10.1177/0042098011410332
Dash, G. and Sood, T. (2013). Why Should One Invest in a Life Insurance
Product? An Empirical Study. Researchers World, 4(1), pp. 36-45.
Dick, A. S. and Basu, K. (1994). Customer Loyalty: Toward an Integrated
Conceptual Framework. Journal of the Academy of Marketing Science, 22(2), pp.
99-113.
George, D. and Mallery, P. (2012). SPSS for Windows Step by Step: A Simple
Guide and Reference, 17.0 Update, 10th
Editon, Pearson Education: India.
Gerpott, T., Rams, W. and Schindler, A. (2001). Customer Retention, Loyalty, and
Satisfaction in the German Mobile Cellular Telecommunications Market.
Telecommunication Policy, 25(4), pp. 46-59.
Gordon, S. (1991). U. S. Savings Bonds for Investment Purposes. The CPA
Journal, 61(12), pp. 76-79.
Mahesh, P. (2012, January 11). How to Choose the Best Infrastructure Bonds this
Tax-Saving Season Analysis. The Economic Times (Online), Retrieved from
http://search.proquest.com/docview/914961413.
Parasuraman, A. et al. (1985). A Conceptual Model of Service Quality and Its
Implications for Future Research. Journal of Marketing, 49(4), pp. 41-50.
Santos, J. Reynaldo A. (1999). Cronbach's Alpha: A Tool for Assessing the
Reliability of Scales, Journal of Extension, 37(2). http://www.joe.org/joe/1999
april/tt3.php - Accessed on August 16th
, 2012.
Singh, J. and Chander, S. (2004). An Empirical Analysis of Perceptions of
Investors towards Mutual Funds, Finance India, 18(4), pp. 1673-1692.
Vardhini C. P. (2012, February 11). Choosing between Tax-Saving and Tax-Free
Bonds. Businessline, Retrieved from http://search.proquest.com/docview/
1322140719.
Financial Assets and Investing
40
Appendix 1 (sample questions from questionnaire)
Questionnaire: Section 2
There are 16 questions in this section and each question has 5 options to choose
from:
a. Totally Disagree - If you do not agree at all with the question.
b. Disagree - If you partially disagree.
c. Neutral – If you are either neutral or not sure whether to agree or disagree.
d. Agree – If you partially agree.
e. Totally Agree – If you 100% agree.
Please answer all the questions one by one by ticking ONLY one option.
1. You are willing to take risks in the investment you make in Tax
Saving Bonds:
Totally Disagree Disagree Neutral Agree Totally Agree
2. You are looking for a better return from investments as compared
to tax savings:
Totally Disagree Disagree Neutral Agree Totally Agree
.
.
.
.
.
.
.
Thank You for Your Time and Patience for Completing the Survey.