Friday, Oct 07, 2022

Saving the money: The savers’ dilemma

As bank FD rates have fallen and small saving rates are set to decline, will the FM compensate the savers in the Union Budget?

(Illustration by: C R Sasikumar) The last major reduction in rates of small savings schemes was during the Vajpayee-led NDA government’s time when rates were slashed by over 250 basis points over time and when inflation was under control, paving the way for a rebound in growth. (Illustration by: C R Sasikumar)

When Indian banks are asked about their reluctance to cut interest rates on borrowings even after the RBI had lowered its key policy rate, one of the justifications they had was that the rates on small savings schemes were way too high and unless that too came down and overall costs declined, it would be difficult for them to reduce rates.

With the government now set to lower rates on small savings schemes or products, it is not just banks, but savers too will face challenges. Term deposit or fixed deposit (FD) rates have already plummeted by 150 basis points and on top of it there could be a blow in the form of lower returns on Post Office Savings Schemes, National Savings Certificates, Public Provident Fund and other products.

They will now have to slowly reconcile to relatively lower returns with inflation now below 6 per cent and with an inflation-targetting agreement in place between the central bank and the government. As of now, real rate of returns, which is nominal rates minus inflation, are positive and well over 2.5 per cent and policy makers would look to bring it down to keep overall lending costs low and provide a boost to investment.

The last major reduction in rates of small savings schemes was during the Vajpayee-led NDA government’s time when rates were slashed by over 250 basis points over time and when inflation was under control, paving the way for a rebound in growth.

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It will be interesting to see a change in investor behaviour now with a lowering of rates on savings products at a time when financing savings have been on the rise, thanks to lower inflation. Investors or savers have been parking money in financial assets with both prices of both gold and real estate being hit. Domestic flows to equities have increased and over the last 20 months, inflows have exceeded the aggregate inflows in the preceding 10 years.


“We have already seen inflows of over Rs 70,000 crore to the equity market in the last nine months. We may see inflows of another Rs 15,000 crore in the remaining period,” said Birla Sun Life Asset Management CEO A Balasubramanian.

But not all savers are savvy investors with many of them preferring the safer avenue of bank deposits. “People should prudently invest in equity and debt schemes for better returns. You can put all your savings in mutual fund schemes,” Balasubramanian said.


For the government, which is keen to push up the savings rate from the current level of 28 per cent to at least closer to the all-time peak of around 38 per cent over seven years ago, it is going to be a tight-rope walk.

Options before the FM

It is not just savers, especially senior citizens, who are worried. Banks too are. Bank deposit growth slowed to 10.88 per cent last month and credit growth was higher than deposit growth at 11.20 per cent for the first time in recent quarters. The biggest fear of bankers is about savers’ money shifting to other financial assets.

That’s why they have proposed three major measures for the consideration of finance minister Arun Jaitley at their pre-Budget meeting. The first demand is an increase in the tax deduction limit. Bankers are keen that the tax deduction limit should be increased to Rs 2.5 lakh from the current level of Rs 1.50 lakh under 80C of Income Tax Act. “Financial savings must be promoted by improving tax incentives by enhancing 80C limits to Rs 3 lakh from the current level of Rs 1.50 lakh,” Yes Bank managing director Rana Kapoor said.


The second demand is that tax should be deducted on interest of above Rs 50,000 as against Rs 10,000 now. Currently, banks cut TDS (tax deducted at source) when the interest income exceeds Rs 10,000 per annum. This limit should be hiked to Rs 50,000 to factor in the changed circumstances, Kapoor said.

Thirdly, bankers have asked the finance ministry to increase the returns of the depositor with inflation-adjusted post tax returns by reducing the lock-in period eligible for tax rebate to one year from five years. Currently, only 5-year term deposits get tax break. Bankers reckon that these measures will offset the losses suffered by savers in the wake of the fall in deposit rates.

The million-dollar question is whether the finance minister will pay heed to the pleas of bankers who privately say that the government has got a bonanza in the form of lower oil prices and the hike in excise duty on fuels.If tax break is allowed for a one-year bank deposit, more depositors will come into the system, Kapoor said. As a major chunk of this money going into infrastructure financing, there’s no reason why the government should not allow tax breaks, bankers say.

Mutual funds are also expecting steps to accelerate fund flow and boost investor interest.

Balasubramanian of Birla Sun Life AMC has proposed that mutual funds should be included in the list of investment avenues to park real estate sale proceeds. “If you sell your house, you have to put that money in the bonds of NHAI or REC. Otherwise you will have to pay capital gains tax. The government should allow real estate sellers to put the proceeds in mutual funds,” he said.


The pension regulator, PFRDA, has been asking for tax incentives so that the National Pension Scheme (NPS) can be on par with Employees’ Provident Fund Organisation (EPFO) products. Right now it’s EET (no tax during contribution and accumulation but taxed during withdrawal) for NPS and the PFRDA is batting for EEE (no tax at any of the stages) structure. “The government said we will look at it. When the tax issue is sorted out, there will be lot more interest,” said a PFRDA official.

On the insurance front, Life Insurance Corporation is looking for tax amendment as it has witnessed a 24 per cent fall in premium of sale of policies.


But for the government which has to boost revenues to spend on public investment, these options may not work. And investor or saver behaviour cannot be influenced unduly by fiscal incentives at a time when the government is readying to lower corporate tax rates and eliminate tax breaks.

From the government’s point of view, such tax breaks for investors or savers may be justified more for long term investments or for social security including pensions. Linking returns to inflation like in the West hasn’t worked with no acceptable benchmark and the few attempts to launch inflation bonds hasn’t worked at all. The divergence between the wholesale price index and consumer price index will make it all the more challenging now.


And with few states set to go for polls this year, it will be a political test too.

First published on: 15-01-2016 at 01:23:12 am
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