On 31 March, the last day of the last financial year, the central government decided to reduce the interest rate on small savings schemes like PPF and NSC from 1 April. However, the next day the decision was withdrawn on 1 April. Now a report prepared by SBI’s Economic Research Department has welcomed the decision not to change the interest rates in an uncertain environment due to Corona epidemic. Apart from this, some suggestions have also been given to the government in this report, such as whether the interest received on the Senior Citizen Saving Scheme should be taxfree or to some extent it should be kept out of the tax net. Apart from ending the lock-in period of 15 years from PPF, investors should be allowed to withdraw their money in a Stipulated Time. However, for this, investors’ incentives can also be cut. This report has been prepared by Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor of SBI.
Small savings schemes are benchmarked with 10-year government securities. Such a change in their rates was necessary as the yield of 10-Year G-Sec fell by 37 bps (0.37 per cent) to 6.05 per cent in Q4 of FY21 as compared to 6.42 per cent in Q4 of FY20. However, the central government did not cut it from the first quarter of FY 2021 to reduce the economic burden due to Corona epidemic.
These suggestions given to the government in the report
Interest on investment in Senior Citizen Saving Scheme is taxable. In the SBI ECORAP report, it has been suggested to the government that it should be tax free or to some extent be kept out of the interest tax. In February 2020, the outstanding amount under these schemes was Rs 73,725 crore and if the government rebates it completely or up to a threshold level, it will have a nominal impact on the government.
It should be discussed whether the interest rates on deposits in India should be decided on the basis of age.
If the interest rates of small savings schemes are fixed every quarter, then the government should ideally end the lock-in period of 15 years for PPF and investors should get the option to withdraw their money in a fixed time. On the first withdrawal of their money to the investors, the government can definitely decide to cut some of the incentives.
Investment in small savings schemes increased after 2008
- The research team of SBI found that due to the economic downturn of 2008, people have increased confidence in small savings schemes and most of the people of West Bengal and Uttar Pradesh are investing in it. The research team has analyzed the state-wise data (FY 2018) and made important conclusions. In this, the people of the top 5 states have a 50 percent stake in small savings schemes.
- In states with high per capita income, bank deposits were attractive, while states with lower per capita income had higher post office deposits. That is, the poor people trust the post office and when their income increases, they shift to bank deposits. Maharashtra and Delhi have very high per capita and post office deposits account for only 60 per cent of the total deposits while for West Bengal and Uttar Pradesh the figure is 86 per cent.
- In low-income states like West Bengal, Uttar Pradesh, Rajasthan and Bihar, people above the age of 60 are more inclined towards post office saving deposits.
- On the basis of 20 years of data, the trend towards small savings schemes has increased rapidly after 2008-09. Prior to the economic downturn, the share of people in these schemes was declining, but after this there was a boom and the preference for post office savings also increased. This boom came not only in states such as West Bengal with low per capita income but also in states like Maharashtra with high income.
Senior citizens will become 15.9% in the country by 2041
The number of senior citizens in India is increasing rapidly and according to one estimate, their number will increase from 10.4 crores in 2011 to 13.4 crores in 2021 and by 2041 the number of people above 60 years will be 23.9 crores. Thus according to the Economic Survey 2018-19 Volume 1, the number of senior citizens in the total population is estimated to increase from 8.6 percent in 2011 to 15.9 percent in 2041. In India, interest from deposits is a major source of income for senior citizens. According to an estimate, there are about 4.1 crore senior citizens term deposits in India, which have deposits of Rs 14 lakh crore.