The research wing of the country’s largest bank — State Bank of India — has called for an exemption on the interest component on the Senior Citizen Savings Scheme in a bid to boost liquidity at the hands of the elders after the Centre slashed interest rate on the scheme by a whopping 120 basis points.
The government has lowered the interest rate on the scheme to 7.4 per cent from 8.6 per cent, while announcing the small savings rates earlier this month.
Under this scheme, a maximum of Rs 15 lakh can be invested by a senior citizen for a period of five years. The investment qualifies for exemption from income tax under section 80C of the Income Tax Act. But interest earned from the scheme is taxable at the slab rates applicable on the individual. The interest amount on a Rs 1 lakh deposit for five years works out to around Rs 40,000.
“We suggest that in the present scenario it is imperative that the government should now exempt interest income from taxes particularly for SCSS for which the government has reduced interest rate by a whopping 120 basis points. The interest income under SCSS at present is fully taxable,” said Soumya Kanti Ghosh, group chief economic advisor, SBI, in a note.
According to the RBI Bulletin, SCSS scheme had an outstanding of Rs 67,394 crore as of November 2019, against Rs 50,840 crore a year ago.
Tax-free bonds
The SBI research wing has also said that as an option to finance the fiscal deficit, the government may consider raising funds through tax-free bonds. Except in 2014-15, the government has issued tax free bonds of Rs 1.45 lakh crore during 2012-16 to finance infrastructure projects.
Tax-free bonds have a lock-in-period but bondholders can redeem them before the maturity date as they are listed on stock exchanges. Considering the fiscal conditions of the government and existing market appetite, we suggest short maturity tax-free bonds, which will benefit both the individuals and government in financing deficits and will be a good hit with markets,” the SBI Research note said.
