Help elderly deal with interest cuts

The government earlier this week took the long overdue decision to slash interest rates on small savings to align them better with bank interest rates. While the southward movement of banks and small saving rates are welcome as it lowers the cost of capital and allows banks to offer cheaper loans to businesses and individuals, the steep cuts also mean that senior citizens who depend on interest income will be far worse off. Over the last year, both RBI and the Centre have been signalling that they want banks to cut lending rates to spur investment.

RBI cut its key overnight lending rate—the repo—five times and the finance minister met bankers over half a dozen times to try and get them to pass on lower lending rates. The rates did come down, but not significantly. One of the problems was that small savings rates remained more attractive, which meant fixed deposit rate cuts by them would simply lead to a flight of deposits from banks to small savings schemes like post office deposits and the National Savings Scheme. Politically, it was difficult for the government to reduce small savings rates in 2019, the year of the general election.

Nor was it an easy decision after that, as a prolonged slowdown in the economy had set in by then and there was a need to safeguard the interest of pensioners who use these schemes. The final timing of the cut, in the middle of the lockdown, has drawn some amount of criticism, but the need cannot be totally denied. Nevertheless, the Centre has a responsibility to safeguard the interests of senior citizens, who use these deposits to earn a pension in the twilight of their lives.

One way this goal could be achieved would be to totally exempt interest income accruing from all deposits held by senior citizens—in small savings or in banks— from personal income tax. The tax giveaway from such a move would not be much, but the impact it would have on the lives and morale of senior citizens, who find their standard of living slipping every year as inflation and lower interest rates eat into their incomes, would be tremendous