Negative Real Interest Rate: Why Interest on Bank Deposits of Some Senior Citizens Should Be Exempted from Tax
Moneylife Digital Team 25 September 2021
Real interest rates have turned negative in India (which means the interest rate is lower than inflation), as has happened in the US and Europe some years back. This has created many problems for savers, especially senior citizens, many of whom have kept most of their money safely with banks. If they have no other income, they would be continuously struggling to cope with the double impact of low interest income and rising inflation, eroding their savings. 
Economists call this financial repression. The financial repression is here to stay since large sections of the population – home loan borrowers, banks, businessmen, investors in risk assets like stocks and real estate – all have a vested interest continuing to remain low because they all benefit from it. 
However, it is the savings with banks that is a significant fuel for the economy. Since depriving savers of a fair interest income that we wish to build prosperity enjoyed by borrowers and investors, it is only fair that the such benefits of financial repression be shared with depositors who are cheated with negative interest rates. 
One way to do this is to give a tax break on interest earned, especially by senior citizens who have no other or insignificant other income. 
In the banking sector's total term deposits, contribution by 40-million plus senior citizens, who remain much dependent on accrued interest income for meeting most of their fixed expenditure needs, hovers around 20%. Despite some banks offering an incremental rate of 25-50 basis points (bps) to this vulnerable class, the pressure to keep deposit rates low to accommodate loan pricing squeezes their return. 
Many bankers agree that there is a need to relook and exempt senior citizens from the tax on interest earned from deposits. Not every senior citizen in the country is a retired government employee receiving a fat pension. What such retirees have is the tax-paid money, saved and then deposited in banks and government schemes. The majority of these seniors are entirely dependent on the interest income earned from these savings and deposits. If the lower returns are not enough, they are mandated to pay income tax on the interest earned. This not only leaves them high and dry but sometimes even their deposit principal gets eroded.    
Dr Anil Khandelwal, former chairman of Bank of Baroda (BoB), agrees that senior citizens should be exempted from the income tax on the interest on their deposits. He says, "I find it absolutely fair proposition. With the falling attractiveness of bank deposits in an inflationary scenario, funds are diverted to many risky corporate bonds and share markets. Senior citizens are the worst victims, who are persuaded to divert their funds to risky investment avenues."
Earlier in April this year, the State Bank of India (SBI), in a report, had suggested the Union government to look to provide a complete tax waiver on senior citizen savings scheme (SCSS) and help the elderly build some sort of social security. "February 2020 outstanding under SCSS was Rs73,725 crore.
If the amount is given full tax rebate or up to a threshold level, it will have a nominal impact on the exchequer," the report had said.
Delhi-based Right to Information (RTI) activist Subhash Chandra Agrawal feels, even interest earned from special schemes for senior citizens, including senior citizens savings scheme (SCSS) and Prime Minister Vay Vandana Yojna and RBI bonds should also be made tax-free.
"The Union government should also introduce a single unified saving scheme for senior citizens to be available at all bank branches merging existing SCSS and the Prime Minister Vay Vandana Yojna with a combined maximum investment limit of Rs50 lakh," he says.
Earlier this week, in a report, SBI pointed out that the actual rate of return on bank deposits has been negative for a sizeable period. "We believe, it is now the opportune time to revisit the taxation of interest on bank deposits, or at least increasing the threshold of exemption for senior citizens," it says, adding, "The Reserve Bank of India (RBI) can also relook at the regulation that does not allow interest rates of the banks to be determined as per age-wise demographics." 
 Additionally, while there is no restriction by RBI on benchmarking of loans as against the earlier marginal cost of funds-based lending rate (MCLR) and banks are free to use 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 decision on tax on deposits is a fiscal decision. "What RBI can suggest is because of the negative interest household savings ratio has come down, citizens are investing in a financial asset, real estate based companies, gold, some of which are not captured in household savings category. Bank deposits are the last bastion for safekeeping your savings because of RBI regulations and the Deposit Insurance & Credit Guarantee Corporation (DICGC) at least until now." 
"In the absence of credible social security system like in the US, Europe, old people or pensioners in India are to fend for themselves including medicare, which is prohibitive for old people as insurance companies exclude them almost from coverage. Negative interest for such people is, in fact, like a head tax for living beyond an age. Government should do away with income tax on deposit interest for them or offer inflation-adjusted positive rates to them by instructing RBI and banks," says Mr Rao, who was also principal chief general manager (PCGM) in the department of banking supervision of RBI. 
According to Dr Nita Mukherjee, a retired banker from a development bank, the low-interest rate regime has played havoc with people's retirement planning. "Even the government pensions, as well as the dearness allowance (DA) that the government employees get, keeps getting revised upwards periodically. Nor are they affected by escalating medical expenses as their Central Government Health Scheme (CGHS) is nearly free. That is why the bureaucracy is so impervious to genuine demands for protection of interest rates for non-government servants as well as no tax deducted at source (TDS) on bank deposits and senior citizen schemes." 
"We, as senior citizens, are the most affected. Because of (TDS), we have less spending money, and the long wait for tax refunds makes life even more difficult. Compliant taxpayers like us do not give false form 15H declarations, so we have to claim the refunds of tax," she added.
According to SBI, about 44% of bank deposits across the banking sector, with somewhat little tolerance on either side for major banks, constitute current-account-savings-account (CASA), with current accounts contributing around a fifth of this bucket. 
SBI estimates the total number of depositors in the banking system at around 207 crore, the number of creditors is at 27 crore. The entire bank deposits at Rs151 lakh crore constitute Rs102 lakh crore of retail deposits, including senior citizens.
"Clearly, the real rate of return on bank deposits has been negative for a sizeable period, and with RBI making it abundantly clear that supporting growth is the primary goal, the low banking rate of interest is unlikely to make a northbound movement anytime soon as liquidity continues to be plentiful," the report added. (Read: Excess Liquidity and Pricing of Credit Risk. Are We Doing Enough, Asks SBI)
Earlier this month, the Central Board of Direct Taxes (CBDT) has notified a new rule that mandates senior citizens above 75 years to submit form 12BBA for claiming the benefit of not filing an income tax return (ITR) under section 194P. 
Under section 194P, TDS is deductible only for specified senior citizens above 75 years. These seniors need to submit a declaration of income in form 12BBA to the specified bank as notified by the Union government. The declaration contains information like total income, details of deductions under section 80C to section 80U, rebate available under section 87A and a declaration confirming receipt of income only from pension and interest. (Read: Seniors Above 75 Need to Submit Form 12BBA For Exemption From Filing ITR)
1 month ago
this is a good article and this should go to the notice of finance ministry. the Cenr should look at fixed deposit same as debt fund which are taxed based on indexation.. while we continue to pay tax on the interest income, the principal funds loses value due to inflation. Atleast indexation adjusted tax may be contemplated to have the retired folks atleast do not lose what they have. God help us.
11 months ago
super citizens should be exempt for vaxine so that their heavenly departure is pre-poned . It may release medical load from system and can be productively employed . i feel deliverance is better than sarkari toture
11 months ago
Senior citizens should see the movie "Indian". In which Kamal Hassan played the role of senior citizen. How he eradicate the weeds from the corrupt society's bad guys. So these filthy decision makers are also bad guys for issues concerning Senior Citizens. Shameless are those who are not listening to the demands of senior citizens. I wholeheartedly curse them.
Replied to sjosh705 comment 11 months ago
senior citizen constitute about 5 % population and have insignificant voting power so low attention of vote seekers.. only in speeches they find mention as footnotes and passing references
11 months ago
Tax paying pensioners are worried more about interest rate cuts than poor guys who are below tax levels who make a living hand to mouth. They are hardest hit by interest rate cuts but are contributing to profits of business class.
11 months ago
Tax paying pensioners are worried more about interest rate cuts than poor guys who are below tax levels who make a living hand to mouth. They are hardest hit by interest rate cuts but are contributing to profits of business class.
11 months ago
If Government can grant a limit of 1 lack for capital gains arising in investing in shares, I am sure, waiver of income tax on FD is justified.
Ramesh Popat
11 months ago
kisan, industry, corporates, poor..all given big benifits, but
no to senior citizens. no country for poor men. may allow them
a slow death!
11 months ago
Friends, It is quite unfortunate that Senior citizens who retired from private organisations with PF only and without any pension are taxed on their FD interest income on which their very survival depends. It is unfair to equate them with the seniors who retired from Government service and get Indexed Pension with recurrent DA revisions. It is the fate of Private sector employees that no Govt bothers about how these these poor souls survive. Hats off to those in power and also the bureaucracy who have taken care about just themselves and their own pensions and left the private sector retirees in the lurch to fend for themselves.
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