Banks pitch for bigger tax breaks on interest income to attract deposits

The first budget of Modi 3.0 is being presented next month. It is believed that the government may provide some relief to taxpayers. Dinesh Kumar Khara, Chairman of the country’s largest public sector bank SBI, has suggested that there should be tax relief on income from interest in the budget.

Why did SBI give this suggestion? What are the current provisions regarding tax on interest? Where and how could relief be provided? How will this benefit banks? Let’s understand. As the demand for loans is increasing rapidly in the country, there is no corresponding increase in deposits. This is causing difficulties for banks in lending funds.

Research agency CareEdge’s latest report indicates that commercial banks in the country saw a 19.3% annual growth in lending during the last quarter of the financial year 2024. This has increased banks’ dues to ₹164.3 lakh crore. During this period, deposits grew at a slower pace of 13.6%. Banks had deposits totalling ₹206.1 lakh crore at the end of March 2024. CareEdge estimates that compared to credit growth, deposit growth will remain high this year as well. This could exacerbate problems for banks.

How and when is tax applied on interest under current laws? Let’s find out. Under Section 80TTA of the Income Tax Act, interest earned up to ₹10,000 in a financial year from a savings account is tax-free. This deduction applies to the total interest received from all savings accounts. This deduction is for individuals under 60 years of age and HUFs (Hindu Undivided Families).

If interest on savings accounts exceeds ₹10,000, tax must be paid on the amount above this limit according to the slab rates. Section 80C deduction is available on a 5-year fixed deposit in banks. If the interest on FD exceeds a certain limit, banks deduct TDS at a rate of 10%. However, tax liability doesn’t end here. Income earned from FDs is added to your annual income and taxed according to the income slab. For senior citizens, this limit is ₹50,000 and for individuals under 60 years of age, it is ₹40,000.

Senior citizens, i.e., those aged 60 and above, have a special section 80TTB in the Income Tax Act. Under this section, senior citizens can claim a deduction of up to ₹50,000 on interest earned on savings, FDs, and recurring deposits (RD) deposited. That is, for senior citizens, interest income up to ₹50,000 in a financial year is tax-free. Tax is levied on interest above this limit according to the income slab.

If your total income, including interest, is less than the basic exemption limit, you can fill out Form 15G/15H and submit it to the bank to avoid TDS deduction. Now the question is where and how exemption from tax on interest can be achieved.

Tax and investment expert Balwant Jain says that there is a need to amend Section 80C of the Income Tax Act. The deduction limit under this section was ₹1 lakh in 2003, which was increased to ₹1.5 lakh in 2014. During this period, assuming an average inflation rate of 6%, the deduction limit under 80C should be ₹3.5 lakh. Jain says that in recent years, the scope of Section 80C has expanded with products like NPS and Senior Citizens Savings Scheme.

There should be a separate provision for home loans under this section. Jain says that for senior citizens, interest earned on deposits is a major source of income. Therefore, senior citizens should be eligible for a deduction of up to ₹1.5 lakh under 80C on such income. Apart from SBI, some banks have demanded reducing the tenure of tax saver FDs from 5 years to 3 years.

The lock-in period for Equity Linked Savings Scheme (ELSS) of mutual funds is three years. Tax deduction benefits are available on such investments. Banks believe that reducing the tenure of tax saver FDs could increase deposits in banks. However, there is little possibility of a major change in taxes related to investments.

The government wants more people to choose the new tax regime, which does not provide for deductions on investments.