Economists at the country’s largest lender SBI have said that retail depositors are earning negative returns on their bank deposits. Therefore, there is a need to review the tax levied on the interest earned by them. Economists led by Soumya Kanti Ghosh said in a note that taxation should be reviewed at least for deposits made by senior citizens, if not for all depositors. He said that a total of Rs 102 lakh crore is deposited in the entire banking system.
At present, banks deduct Tax at Source (TDS) from all depositors while depositing interest income above Rs 40,000. Whereas for senior citizens, tax is deducted if the income exceeds Rs 50,000 per year. The focus of the policy has shifted towards growth, with interest rates going down in the system, affecting depositors.
Interest rates unlikely to rise
The note clearly states that the real rate of interest on bank deposits has been negative for a long period of time and the Reserve Bank has made it very clear that the primary goal is to support growth. Banking interest rates are not likely to rise in the near future due to continued liquidity. It also said that due to the high liquidity in the system, there is a lot of pressure on the banks regarding profits at this time.
Increase exemption limit for senior citizens
The note said that we believe that now is the opportune time to reconsider the taxation of interest on bank deposits or at least increase the exemption limit for senior citizens.
RBI may also reconsider the regulation that does not allow banks to set interest rates edge-wise demographically.
Meanwhile, the note also said that banks are currently facing margin pressure due to excess liquidity in the system.