With country's population of old set to double over the next few decades, government should look to provide complete tax waiver on senior citizen savings scheme (SCSS) and help the elderly build some sort of social security, said the SBI Ecowrap report.
According to the report, the share of India's elder or senior citizen population is increasing from 8.6 per cent in 2011 to 15.9 per cent in 2041. This, the report said, will pose a huge challenge for policy making at social and economic levels and, therefore, it is necessary to build incentives around small savings schemes, which are most popular form of financial savings of households in India.
The report, authored by SBI group chief economic advisor Soumya Kanti Ghosh, suggested complete tax waiver on SCSS to provide more money into the hands of senior citizens in the absence of any comprehensive social security scheme, like the ones existing in the West, for this section of the population.
The interest on SCSS is fully taxable. The February 2020 outstanding under SCSS was Rs 73,725 crore. If the amount is given full tax rebate/up to a threshold level it will have nominal impact on the exchequer, the Ecowrap report said.
The report said that interest rates offered on deposits in India are also demography agnostic (barring the separate rate for senior citizens). However, going forward, the report said, 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 ensuring a lower lending rate structure, adequate returns for senior citizens, lower interest expenditure and an alternative to floating rate deposits," the Ecowrap report said.
Furthering the cause for senior citizens for a wholesome financial security after the active service life, SBI Ecowrap has also suggested that the government should maintain parity in interest rates between organised sector/EPF and unorganised/PPF.
It said that as small savings scheme (SSS) rates are adjusted in every quarter, the government should ideally remove the 15 year lock-in period for the PPF and give the investors the option to withdraw their money within a stipulated time.
The report also brought about interning aspect of SSS. According to it, the post-office savings deposits are negatively correlated to per capita income while bank deposits are positively correlated with per capita income. This indicate that poor people are more reliant on post-offices for their savings and when the income increase they shift to bank deposits first and not to financial products.
That's why the proportion of post-office deposits in Maharashtra & Delhi, where per capita income is very high is only 60 per cent.
Moreover, in states with low per capita income like West Bengal, Uttar Pradesh, Rajasthan and Bihar, the elderly population of 60+ has a clear preference to invest in post office saving deposits.
Also, what has sparked this large interest in small savings. The report said this can be found after seeing the trend of last 20 years data on gross small savings collections. In this, a structural break is clearly visible in 2008-09. The share of different states in gross small saving collections were declining till the global financial crisis. However, post the financial crisis in 2008, there has been a significant jump in preference for post office savings. This jump is maximum in low income states like West Bengal and even in high income states like Maharashtra.
Fourthly, the report said, the huge post-office collections in states like West Bengal and Uttar Pradesh and the preponderance of Kisan Vikas Patras (indicate the lack of financial literacy for the products like mutual funds, etc. particularly in West Bengal, sometimes the left of political ideology that everything that market does is bad in fact results in asymmetric results with poor people investing more in chit funds, etc. the live example of this is the Rs 20,000-30,000 crore Saradha scam. Most of the times these types of scams are also the product of political dispensation.
"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," said the Ecowrap report.