In view of the declining interest scenario, the government should consider exempting interest earned by senior citizens under SCSS from income tax as the fiscal cost would be minimal, a SBI study said on Tuesday.
Under the Senior Citizens Savings Scheme (SCSS), a senior citizen can deposit up to Rs 15 lakh and the current interest rate is 8.6 per cent. The tenure of this scheme is five years with the option to extend it for three more years.
However, the interest on SCSS is fully taxable, which is a major drawback of this scheme (the interest amount for Rs 1 lakh deposit for 5 years is around Rs 51,000 which is taxable).
"It will be fair if such amount is given full tax rebate as the revenue foregone by the government could be only Rs 3,092 crore, that will have the minimal 2 bps impact on government fiscal deficit," said the SBI Ecowrap report.
Most of the banks, including SBI, have been reducing interest on fixed deposits in tandem with the Reserve Bank of India's decision to slash its policy rate (repo), which will have a bearing on interest income of senior citizens.
With the RBI mandating banks to link lending rates to external benchmark from October 1, the stage is now set for instantaneous transmission of change in repo rate to lending rates.
Thus, if the repo rates changes by 25 bps in either direction, lending rates will change in exact equivalent amount in either direction.
While such an external benchmarking is most welcome, some points deserves special mention, the report said.
"First, our estimate suggests that there are around 41 million senior citizens term deposits accounts in the country with total deposit of Rs 14 lakh crore, 7 per cent of India's GDP," said Ecowrap.
The average deposit size per account, it added, is around Rs 3.3 lakh and interest income from such deposits forms 5.5 per cent of Private Final Consumption Expenditure (PFCE) in 2018-19.
"Given the declining interest rate scenario, this might go down and will impact PFCE also," it said.
The second point is that the RBI should also now mandate that the liability of the banks "also move in tandem" with lending rates.
Possibly, the only solution is that the regulator strictly enforces that all incremental bulk deposits have to be repo linked or otherwise, it added.
As per the SBI study, rough estimates indicate that a 100 basis points decline in deposit rates (bulk and savings bank) translates into around 45-50 bps decline in lending rates.