In this article, I discuss why the govt can use income tax (IT) slab rates as a primary guide for fixing small savings scheme interest rates to (1) reduce hardships to lower-income groups and senior citizens and (2) avoid cringy embarrassment such as this PPF rate cut reversed but do not reverse your decision to reconsider it!
The government bond yield based formula can be used as a secondary guide to decide interest rates for each quarter. Every citizen in India whether can invest Rs. 100 a month or Rs 100,00,000 a month is given the same rate. When the rates are cut, the former citizen is affected the most, but we do not listen to their lament because they are not on social media.
The govt. has already taken a step in the right direction by making employee contributions up to R. 2.5 lakh in PF tax-free and beyond that taxable as per slab. The same kind of logic can also be implemented to small savings interest rate in some convenient format.
The rates can be variable as per annual income (IT slab the person falls in), or it can be variable depending on the annual contribution. For example, the Sukanya Samriddhi Account is primarily meant for girl children born in lower-income households. The govt. could either make contributions by those in 30% tax slab taxable (thereby changing effective interest rate for them), or they could offer different interest rates for different contributions (which is a proxy for tax slabs).
- For eg. 8% for annual contributions up to Rs. 50,000
- 7.5% for annual contributions between Rs. 50,0001 to Rs. 1,00,000
- 7% for higher contributions etc.
The same can be done with PPF. Senior citizens in the 0% tax slab can get the highest interest rates, progressively reducing but still higher than other schemes.
Interest rates have to depend on inflation and long-term reduction in govt. borrowing. There is no escape from this. Rate may move up and down in the short-term but must reduce in the long-term.
However, by using a contribution-based or IT slab-based categorisation, the increment the govt. provides to different sections of the society can be different, and rates of reduction can be different.
For example, The govt provides 0.25% more returns in PPF“prevailing 10Y bond market rates”. This is the formula, but actual implementation depends on “several factors”, to put it mildly. See Worried about 7.1% PPF interest rate? It is higher than what it should be!
The govt could provide 0.75% extra returns in PPF for those in 0%, 5% slabs, 0.5% for those in 20% and 0.25% for those in 30% or some such segmentation. This will help those who need the help the most and reduce the debt burden for the govt gradually.
Whoever is in power can claim that they are taking care of lower-income groups (this by definition refers to those who do not trend hashtags on Twitter). This will take care of anti-incumbency fears.
Even the loudmouths on social media will have relatively lesser to complain about. The “rich” get taxed more – their rates gets slashed more; the middle-class take a smaller hit, and the poor even lesser or not at all.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 1000 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2800 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 675 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)