Case for tax cut on deposit interest
A State Bank research report has suggested major changes in the tax treatment of interest rate on bank deposits as the real interest rate on deposits have turned negative amid the lure of returns of the stock markets.
The report by the SBI research division said it was time the government reconsiders taxation on bank deposits or at least raises the threshold of exemption for the senior citizens.
Banks at present deduct tax at source (TDS) of 10 per cent if the interest income of a depositor is over Rs 40,000. For senior citizens, TDS applies on interest income of over
Rs 50,000 in a year.
Its observations come at a time depositors continue to see negative real return (after accounting for inflation) on their bank deposits.
The Reserve Bank of India (RBI) should also take a relook at a regulation that does not allow bank interest rate to be determined “as per age-wise demographics”.
Moreover, the RBI has kept liquidity in the banking system in a surplus mode and deposit rates are likely to remain soft as priority is given to growth.
The report said amid such a trend, the credit risk may not be getting adequately reflected in the pricing of loans.
The core funding cost of the banking system, which includes the cost of deposits, negative carry on statutory liquidity ratio (SLR) and cash reserve ratio (CRR) is 6 per cent, while the reverse repo rate is at 3.35 per cent. If the cost of provisions is added to the core funding cost, the total cost comes to around 12 per cent.
The report said the risk premia over and above the core funding cost are not reflecting the inherent credit risk. A 15 year loan, for example, is priced even lower than 6 per cent.