Tax relief on deposits, home loans and a standalone refinancing body for non-banking financial companies (NBFCs) are among the top recommendations that bankers have made to the Centre ahead of the upcoming Budget for FY25.
State Bank of India (SBI) chairman Dinesh Khara, for instance, has pitched for a tax relief on the income account holders earn from interest. “If at all some relief could be given regarding tax on the interest earnings, it will be an incentive to depositors. Eventually, the banking sector uses deposits mobilised for the capital formation in India,” he told PTI in an interview in June.
Under the current taxation laws, banks deduct tax on interest income earned on deposits (in all the bank branches) when it exceeds Rs 40,000 a year. For a savings account, interest earned up to Rs 10,000 is exempt from tax.
Further, currently under the Section 24 (b) of the Income Tax Act, individuals can claim a home loan tax deduction of up to Rs 2 lakh on the interest amount. This amount, bankers say, must be enhanced to Rs 3 lakh.
“Most other tax savings instruments have a lock-in of three years. In banks, tax saving FD (fixed deposit) tenure is five years. This is one issue why banks are not able to mobilise higher deposits,” a senior banker said, adding that the Centre must bring the tenure of tax saver FD on par with that of other tax savings instruments.
To promote green financing, banks also need interest subvention, says Jyoti Prakash Gadia, MD at Resurgent India. To attract green deposits, banks require incentives, tax exemptions or subsidies.
“Reducing the cost of green infrastructure projects is essential to making them more viable and competitive. The government should introduce a hybrid annuity model (HAM) scheme for the renewable energy sector, similar to the one used in the road sector, where the government partially contributes to project costs,” he said.
While the classification of priority sector lending and lower capital adequacy ratio (CRAR) provisions for renewable energy projects fall under the RBI’s purview, the government can facilitate such decisions to support bank lending, he added.
NBFC proposals
Finance Industry Development Council (FIDC), an industry body of NBFCs, has requested finance minister Nirmala Sitharaman to create a dedicated refinancing body for NBFCs, on the lines of how the National Housing Bank (NHB) provides capital to housing finance companies (HFCs).
“Over the years, liquidity has been a recurring challenge for NBFCs, especially large number of small and medium sized NBFCs. Sources of funding like public deposits and external commercial borrowings (ECBs) have been restricted,” the industry body said.
“With the recent concerns on the over dependence on banks for funding have further added to the liquidity concerns. There is, therefore, an urgent need to create a dedicated refinance window for NBFCs to ensure a smooth and sustainable flow of funds that would also help address the concerns relating to asset liability mismatch,” it said, adding that funds raised through this mechanism may be exclusively used to finance MSMEs and priority sectors.
George Alexander Muthoot, Muthoot Finance MD, said that the NBFC has requested the finance minister to remove the 10% TDS on interest payments on NCDs. “The government thought of introducing the TDS on listed securities thinking that the customers are not paying the tax. Since the securities are listed, there was no need to deduct TDS as there is an adequate trail of holders and interest payments,” he said.
