State Bank of India (SBI) Chairman Dinesh Kumar Khara is batting for tax relief on interest income in the forthcoming Union Budget - something all bankers, hand on heart, would love to see when growth in banks' credit is outpacing the growth in deposits, for many.
Currently, banks need to deduct tax popularly known as tax deducted at source, or TDS - when one's interest income on deposits held exceeds 40,000 a year. For savings accounts, up to Rs 10,000 interest earned is exempted from tax. "If at all some relief could be given in the Budget regarding tax on interest earnings, it will be an incentive to depositors... The banking sector uses deposits mobilised for the capital formation in the country," Khara told news agency PTI last month.
Bankers have been pitching for this for years but have not been able to convince the finance ministry. When it comes to paying tax, investors in mutual funds and direct equities have an advantage over bank depositors. Unlike other financial asset classes, deposits are taxed on an accrual basis - not on redemption.
India's household net financial savings plunged to a five-year low of ₹14.2 trillion in FY23, sharply down from 17.1 trillion in FY22. As a percentage of GDP, the household net financial savings in FY23 dropped to 5.3 per cent, the lowest in around five decades. Between FY12 and FY22 (excluding the Covid-19 year, FY21), the net financial savings were around 7-8 per cent of GDP. Tax benefits can make deposits attractive and push up household financial savings.
Similarly, the health insurance sector wants lower GST for the policy buyers and higher tax deductions (under Section 80D of the Income Tax Act), particularly for senior citizens, even as the fintechs are rooting for the government to support their right to innovate.
These are evergreen issues. At the macro level, the twin objective of the Budget is likely to be fiscal consolidation and growth.
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