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Cause–Effect reasoning: Identify the relationship between Statement I and Statement II. S1: The government decided to give tax benefits for small savings (on investments and accruals) while taxing all withdrawals. S2: People have been investing more in small savings than in the equity market to avail maximum tax benefits. Choose the correct cause–effect option.

Difficulty: Easy

Statement I is the cause and Statement II is its effect.
Statement II is the cause and Statement I is its effect.
Both statements I and II are independent causes.
Both statements I and II are effects of independent causes.
Both statements I and II are effects of a common cause.

Correct Answer: Statement I is the cause and Statement II is its effect.

Explanation:

Given data

S1: Policy grants tax benefits to small savings (investments/accruals), but taxes withdrawals.
S2: Households prefer small savings over equity to capture tax advantages.

Concept / Approach
Tax incentives alter after-tax returns and therefore investor behavior. A preferential tax structure for small savings predictably shifts flows toward those instruments.

Reasoning
Policy incentive (S1) ⇒ relative attractiveness of small savings ↑ ⇒ higher allocations to small savings (S2).

Option check
A is consistent with standard behavioral response. ✔ B/C/D/E do not match the clear incentive→response chain given.

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