Interest rates in India have dropped dramatically since the central government's demonetisation decision in November 2016. It hasn't helped senior citizens, who use fixed deposits, generate a regular income to meet their monthly expenditure. Given this, it was believed that Finance Minister Arun Jaitley would announce a Budget friendly towards senior citizens. And he has come out with help on that front.
Jaitley increased the exemption of interest income on deposits with banks and post offices, from Rs 10,000 to Rs 50,000, for senior citizens. For those in the 30 percent income tax bracket, this means an increase in income of Rs 12,000 per year or Rs 1,000 per month.
At the same time, Jaitley also stated that tax deducted at source (TDS) wouldn't be required to be deducted on such income. He also increased the deduction limit for health insurance premium and/or medical expenditure from Rs 30,000 to Rs 50,000, under Section 80D.
"All senior citizens will now be able to claim benefits of deduction up to Rs 50,000 per annum regarding any health insurance premium and/or any general medical expenditure incurred," Jaitley said in his speech on Thursday.
This is a welcome development for senior citizens. The Economic Survey had listed out how the level of interest rate impacts different groups. It listed out different groups, from manufacturers to service-oriented companies to infrastructure companies to the government to domestic and foreign equity investors, and finally, to households. Every group other than households likes low interest rates. Households are the only exception, and like the idea of high interest rates.
This explains to a large extent why there is so much noise around the demand for low interest rates. This noise emanates from the fact that every group other than households has some lobbying power, which they all use to demand low interest rates.
A bulk of Indian households use fixed deposits to generate a regular income through which they meet their monthly expenses. In a falling interest environment, as old fixed deposits which had been booked at higher interest rates, start to mature, the senior citizens end up having a problem. This is something that is playing out now.
This becomes especially true during a period when real interest rates are also falling. Real interest rate is defined as the difference between the nominal interest rate and the rate of inflation. If the fixed deposit pays a rate of interest of 7 percent and the rate of inflation is around 5 percent, real interest rate is 2 percent.
Real interest rate in India since March 2016
Real interest rate has been falling for a while now. This basically means that the rate of inflation has been going up and the nominal rate of interest has continued to remain flat. In this scenario, those who make a regular income from their fixed deposits, in particular senior citizens, had been losing out. As can be seen from the graph above, the real rate of interest as of December 2017, was less than one percent.
One way out of this is to pay senior citizens a slightly higher rate of interest. This is something that many banks already do. But a higher interest of 0.25-0.5 percent barely makes any difference. Also, some post office savings schemes give a higher rate of interest to senior citizens. But dealing with India Post, when it comes to regular income from savings, can be quite a pain.
In this scenario, the simplest thing that the government could have done was to make the interest earned on fixed deposits and other forms of deposits tax-free, which is what the finance minister has done to some extent.
In a country with very little social security and hospitals which are ready to rob you all the time, this is something that we owe to our senior citizens. Yes, the government will earn a lesser tax revenue due to this, but there are different ways of making up for that.
Updated Date: Feb 01, 2018 15:14 PM