The government recently reversed a sharp interest rate cut on small savings plans like PPF and NSC, claiming that it was an oversight. The transition has been greeted positively by economists at India’s largest bank, SBI. “Given that we are currently experiencing an ongoing pandemic crisis, we think the government made the right decision by not changing the rates on small savings schemes.”
SBI economists have proposed three steps for small savings schemes in a survey. “We believe a three-pronged approach could be implemented that would be advantageous to everyone,” the report said.
The following are some ideas:
1) Economists have proposed a tax break on interest on Senior Citizen Savings Scheme deposits. “Senior Citizen Savings Scheme income is entirely taxable. The outstanding amount under the Senior Citizen Saving Scheme in February 2020 was 73,725 crore. If the sum is granted a full tax rebate/up to a certain threshold, the effect on the exchequer would be minimal.”A senior citizen can deposit up to 15 lakh under the Senior Citizens Savings Scheme, with a current interest rate of 7.4%.
2) According to the report, “significant consideration should be given as to whether interest rates offered on deposits in India are related to an age-based interest rate structure.”
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“Deposit interest rates in India are also demographically agnostic” (barring the separate rate for senior citizens). However, we believe that, in the future, this strategy could transition to an age-based interest rate structure, with rates linked to long-term bank deposit rates after a certain age group, and a higher-than-market rate after that age group. This could serve several purposes in one go, including (a) ensuring a lower lending rate structure, (b) appropriate returns for senior citizens, (c) lower interest spending, and (d) an alternative to floating rate deposits,” according to the study.
3) “PPF is a government-backed, zero-default risk, long-term small savings scheme analogous to quasi floating rate deposits with the aim of providing retirement coverage to self-employed individuals and employees in the unorganized market,” according to the third paragraph. Since small savings scheme rates are changed every quarter, the government should preferably eliminate the 15-year lock-in period for PPF and offer investors the option to withdraw their money within a set period of time with some form of penalty!”
“The PPF is a government-backed, zero-risk, long-term small savings program, similar to quasi-floating rate deposits, with the aim of providing retirement coverage to self-employed individuals and employees in the unorganized sectors.” For the greater objective of social stability, we expect the government to preserve interest rate equilibrium between the organized sector/EPF and the unorganized sector/PPF. Since SSS prices are changed every quarter, the government should eliminate the 15-year lock-in period for PPF and allow investors to withdraw their money within a set period of time, according to the study.
