Real interest rates have turned negative in India (meaning the interest rate is lower than inflation), as happened in the United States and Europe a few years ago. This has created a lot of problems for savers, especially the elderly, many of whom have kept most of their money safe with banks. If they have no other income, they would permanently struggle to cope with the double impact of low interest income and rising inflation, eroding their savings.
Economists call it financial repression. The financial crackdown is here to stay because large sections of the population – mortgage borrowers, banks, businessmen, investors in risky assets like stocks and real estate – all have a vested interest in staying weak because they all benefit.
However, it is the savings with the banks which is an important fuel for the economy. By depriving savers of a fair interest income which we wish to build prosperity for borrowers and investors alike, it is only right that such benefits of financial repression be shared with depositors who are cheated with negative interest rates.
One way to do this is to give tax relief on interest earned, especially by older people who have no other income or insignificant income.
In the total term deposits of the banking sector, the contribution of 40 million and more of the elderly, who remain very dependent on accrued interest income to cover most of their fixed expenditure needs, hovers around 20%. Although some banks are offering an incremental rate of 25 to 50 basis points (bps) to this vulnerable class, the pressure to keep deposit rates low to accommodate loan pricing is reducing their yield.
Many bankers agree that there is a need to rethink and exempt seniors from tax on interest earned on deposits. Not all of the country’s seniors are retired civil servants receiving a large pension. What these retirees have is money paid in taxes, saved and then deposited in banks and government plans. The majority of these seniors depend entirely on the interest income earned from these savings and deposits. If the lower returns are not enough, they are required to pay tax on the interest earned. This not only leaves them high and dry, but sometimes even their deposit capital erodes.
Dr Anil Khandelwal, former chairman of the Bank of Baroda (BoB), agrees that older people should be exempt from income tax on interest on their deposits. He says: “I find this proposal absolutely right. With the attractiveness of bank deposits declining in an inflationary scenario, funds are being diverted to many risky corporate bonds and stock markets. The elderly are the worst victims, who are persuaded to divert their funds into risky investment avenues.
Earlier in April this year, the State Bank of India (SBI), in a report, suggested that the Union government seek to provide full tax exemption on the Seniors Savings Scheme (SCSS) and help the elderly to build up some sort of social security. . “The February 2020 outstanding under SCSS was Rs73,725 crore.
If the amount receives a full tax refund or up to a certain threshold, it will have minimal impact on the treasury, ”the report said.
Delhi-based Right to Information (RTI) activist Subhash Chandra Agrawal believes that even the interest charged by special schemes for the elderly, including the Savings Scheme for the Elderly (SCSS) and the Premier Minister Vay Vandana Yojna and RBI bonds should also be tax exempt.
“The Union government should also introduce a unified savings scheme for seniors available in all bank branches merging the existing SCSS and Prime Minister Vay Vandana Yojna with a combined maximum investment limit of Rs50 lakh,” said he declared.
Earlier this week, in a report, the SBI pointed out that the real rate of return on bank deposits has been negative for quite a long time. “We believe the time has come to review the taxation of interest on bank deposits, or at least increase the exemption threshold for the elderly,” he said, adding that “The Reserve Bank of India (RBI ) may also revamp regulations that do not allow bank interest rates to be determined based on age demographics. ”
Additionally, while there are no RBI restrictions on benchmarking loans against the previous marginal cost of the funds-based lending rate (MCLR) and banks are free to use n Any benchmark published by Financial Benchmarks India Pvt Ltd (FBIL), continued restrictions on not allowing negative spread on MCLR may also be removed.
G Jaganmohan Rao, former Managing Director (MD) of Bank Note Paper Mill India Pvt Ltd, points out that the deposit tax ruling is a tax ruling. “What the RBI may suggest is that due to the declining negative interest rate on household savings, citizens are investing in financial assets, real estate companies, gold, some of which are not. are not included in household savings category. Bank deposits are the last bastion to hold your savings due to RBI and Deposit Insurance & Credit Guarantee Corporation (DICGC) regulations at least so far. ”
“In the absence of a credible social security system like in the United States, Europe, the elderly or retirees in India have to fend for themselves, including health insurance, which is prohibitive for the elderly because insurance companies almost exclude them from coverage. Negative interest for these people is, in fact, like a head tax for living beyond an age. The government should remove the income tax on them. deposit interest for them or offer them positive inflation-corrected rates by giving instructions to the RBI and banks, ”said Mr. Rao, who was also senior managing director (PCGM) in the banking supervision department from RBI.
According to Dr Nita Mukherjee, a retired development banker, the low interest rate regime has taken its toll on people’s retirement planning. “Even government pensions, as well as the cost allowance (DA) that government employees receive, continue to be revised upward periodically. They are also not affected by escalating medical expenses as their The central government health scheme (CGHS) is almost free. why the bureaucracy is so insensitive to actual demands for interest rate protection for non-government officials as well as the lack of withholding tax (TDS) on bank deposits and plans for the elderly. ”
“We as seniors are affected the most. Due to (TDS) we have less spending money, and the long wait for tax refunds makes life even more difficult. Compliant taxpayers like we don’t make false statements 3pm, so we have to claim the tax refunds, ”she added.
According to the SBI, about 44% of bank deposits in the entire banking sector, with little tolerance on either side for the big banks, constitute a current account savings account (CASA), with current accounts representing about a fifth of this compartment.
SBI estimates the total number of depositors in the banking system at around 207 crore, the number of creditors at 27 crore. All bank deposits at Rs151 lakh crore constitute Rs102 lakh crore of retail deposits including senior citizens.
“Obviously, the real rate of return on bank deposits has been negative for quite a long time, and the RBI having made it clear that supporting growth is the primary objective, the low rate of return is unlikely. bank interest is making a move north anytime soon. liquidity continues to be plentiful, “the report adds.Read: Excess liquidity and pricing of credit risk. Are we doing enough, asks SBI)
Earlier this month, the Central Commission on Direct Taxes (CBDT) notified a new rule that requires people over the age of 75 to submit Form 12BBA to claim the benefit of not filing a tax return ( ITR) under section 194P.
Under section 194P, the TDS is only deductible for people over 75 years of age. These seniors must submit an income tax return in the form 12BBA to the specified bank, as notified by the Union government. The statement contains information such as total income, details of deductions under section 80C to section 80U, refund available under section 87A and a statement confirming receipt of income only from the pension and interest. (Read: People over 75 must submit Form 12BBA to be exempt from filing RTI)