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Protect small savers and seniors - Outside View by S.S. TARAPORE
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Protect small savers and seniors
May 5, 2014

After the formation of a new government, the regular budget for 2014-15 will be presented by the end of June or early July 2014. Articulate lobbies, like industry, agriculture, banks/financial institutions and economists, will all have an opportunity to air their views. In all this din, the voice of small savers and senior citizens will be drowned and, it is, therefore, important that their concerns are addressed.

Remuneration to small savers

Over the past 15 years, a strong view has emerged that small savers have nowhere to go and that they will meekly accept low rates of return on their savings. This is not only iniquitous, but damaging to the economy, as not only have household sector savings fallen, but there has also been a shift from financial savings to physical savings. One fervently hopes that the new government would give overriding priority to address this issue.

Life cycle of savings

It is important to appreciate the typical life cycle of savings. Individuals build up savings during their working life to enable them to meet their expenditure during their later years. In India, the bulk of individuals do not have any meaningful social security and hence it is important that there is not a hostile tax regime for senior citizens.

At present, on long–term savings like pension funds and provident funds, such investments are exempt from income tax (i.e. a specified amount is deductable from the taxable income), the interest is also exempt and the withdrawal is also exempt (i.e. the EEE system).

There is a threat to savers that while contributions to these specified schemes, as well as interest, are exempt from tax, withdrawal would be added to income in the year of withdrawal (i.e. the EET system).If the balance at the end of the period is withdrawn, about a third would be lost to the saver by way of tax.

In India, a number of retirees relocate and need to deploy their entire retirement funds and they cannot be expected to withdraw only the annual interest. The EET system in India would be tantamount to extreme cruelty and the government should categorically indicate that the EET system has been tossed out and would not be applied in India.

Income tax exemption limit

At present, the income tax exemption limit for individuals is Rs 2,00,000. For senior citizens above the age of 60 years, the limit is Rs 2,50,000 and for those over 80 years, the exemption limit is Rs 5,00,000. In this context, three amendments are desirable.

First, the general exemption limit should be raised to Rs 3,00,000, as recommended by the Standing Committee on finance with Yashwant Sinha as chairman. The argument against this is that a large number of individuals will be out of the income tax net. The pertinent point is that the tax collected from incomes up to Rs 3 lakh is insignificant. Moreover, tax administration would improve and be more effective.

Secondly, the enhanced basic exemption for women was withdrawn a couple of years ago. This was an insensitive measure. Working women have to spend more for household help. It is inexplicable why women Parliamentarians remain silent, instead of storming the citadels of the ministry of finance.

Thirdly, it is necessary to appreciate the life span in India. Relatively few individuals survive into their 80s and hence a higher exemption limit at over age 80 years is an empty gesture. A sensitive government would have an intermediate category at age 70 years, which could be less than the exemption limit for age over 80 years.

Section 80C deduction

At present, under Section 80C, specified savings are deducted from income up to Rs one lakh. In the case of senior citizens, the basic exemption limit should be raised by Rs one lakh, and for senior citizens, there should be no exemption limit under Section 80 C. This would be consistent with the life cycle of savings.

Inflation Indexed Bonds ( IIBs)

While retail IIBs, with indexation to the Consumer Price Index (CPI) have been introduced in 2013-14, there is a major flaw in that interest is compounded half-yearly, but paid only on maturity. This prevents senior citizens from investing in these bonds. A simple amendment for a payout of interest on a semi-annual basis would result in an upsurge in subscriptions particularly as senior citizens would throng to this instrument.

Old age pensions

At present, there is a scheme for old age pensions. The government should put in the public domain the number of persons covered by this scheme. Rather than raising the old age pension amount, there should be a concerted campaign to cover all eligible individuals under this scheme. Our cultural heritage is respect and care for elders. If we believe in this, surely the first step would be to support the aged through effective fiscal measures.

Please Note: This article was first published in The Freepress Journal on May 05, 2014. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Protect small savers and seniors"

S Paul Choudhury

May 12, 2014

I do AGREE on all the points as suggested...
Everyone should raise their VOICE on this issue..



May 5, 2014

sensible suggestions and hope that a goverment without PC will listen and implement a more friendly tax regime .the current tughlak durbar is becoming unbearable .

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