The government recently rolled backed the the steep interest rate cut on small saving schemes such as PPF (Public Provident Fund) and NSC, saying it was an oversight. Economists at India’s biggest bank SBI have welcomed the move. “We believe the government has taken the best decision of not changing the rates on small saving schemes as we are currently going through an unprecedented pandemic crisis.”
In a report, SBI economists have also suggested three measures for small savings schemes. “We believe a 3 fold strategy may be undertaken which could be beneficial for all,” the report said.
Here are the suggestions:
1) The economists have suggested income tax rebate on interest on Senior Citizen Savings Scheme. “The interest on Senior Citizen Saving Scheme is fully taxable. The Feb’20 outstanding under Senior Citizen Saving Scheme was ₹73,725 crore. If the amount is given full tax rebate/ up to a threshold level it will have nominal impact on the exchequer.” Under Senior Citizens Savings Scheme, a senior citizen can deposit ₹15 lakh and the current interest rate is 7.4%.
2) The report also suggested that “serious thought could be given of whether interest rates offered on deposits in India are linked to an age-wise interest rate structure.”
“Interest rates offered on deposits in India are also demography agnostic (barring the separate rate for senior citizens). However, going forward, in our view, this approach should shift to an age-wise interest rate structure, with rates linked to long-term bank deposit rates till a certain age group, and offering a higher than market rate over that age group. This could, in one go, serve the multiple purposes of (a) ensuring a lower lending rate structure, (b) adequate returns for senior citizens, (c) lower interest expenditure and (d) an alternative to floating rate deposits,” it said.
3) Third, “PPF is a government-backed, zero-default risk, long-term small savings scheme akin to quasi floating rate deposits with the objective to provide retirement security to self-employed individuals and workers in the unorganised sectors. As small saving scheme rates are adjusted in every quarter, Government should ideally remove the 15 year lock-in period for PPF and give the investors the option to withdraw their money within a stipulated time with some sort of disincentive of course!”
“PPF is a government-backed, zero-default risk, long-term small savings scheme akin to quasi-floating rate deposits with the objective to provide retirement security to self-employed individuals and workers in the unorganised sectors. “We expect the government to maintain a parity in interest rates between organised sector/EPF and unorganised/PPF for the larger goal of social security. As SSS rates are adjusted in every quarter, government should ideally remove the 15 year lock-in period for PPF and give the investors the option to withdraw their money within a stipulated time,” the report said.
