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Tuesday, October 26, 2021

‘Real returns negative, need review of tax on bank deposits’

Arguing for more sops to depositors, the SBI report said the threshold of exemption for senior citizens should be reviewed.

By: ENS Economic Bureau | Mumbai |
September 22, 2021 3:53:59 am
“The RBI can relook at the regulation that does not allow interest rates of banks to be determined as per age-wise demographics,” it said.

With the real rate of return on bank deposits remaining negative “for a considerable period of time”, it’s time to revisit the taxation of interest on bank deposits, State Bank of India said in a research report.

Arguing for more sops to depositors, the SBI report said the threshold of exemption for senior citizens should be reviewed. “The RBI can relook at the regulation that does not allow interest rates of banks to be determined as per age-wise demographics,” it said. The interest income from bank fixed deposits is subject to TDS (tax deducted at source) at 10 per cent but can be deducted at 20 per cent if PAN is not furnished. Banks deduct TDS on interest paid on fixed deposits when interest income exceeds Rs 40,000 (Rs 50,000 for senior citizens) in any given financial year. So, if the depositor is in highest tax bracket of 30 per cent, merely paying TDS of 10 per cent will not be enough. Retail inflation is above 5 per cent while one-year term deposit gets less than 5 per cent interest rate, giving negative returns on deposits.

Explained

Inflation woes

Currently, retail inflation is above five per cent while one year term deposit gets less than five per cent interest rate, giving negative returns on deposits.

The total number of depositors in the banking system is around 207 crore and the number of creditors is at 27 crores. The total bank deposits at Rs 151 lakh crore constitute Rs 102 lakh crore of retail deposits, including that of senior citizens. “Clearly, real rate of return on bank deposits has been negative for a sizeable period of time and with RBI making it abundantly clear that supporting growth is the primary goal, the low banking rate of interest is unlikely to make a north bound movement anytime soon as liquidity continues to be plentiful,” said the report authored by Soumya Kanti Ghosh, group chief economic adviser, SBI.

The negative return from bank deposits could be one of the reasons for households to divert funds to the stock markets for more returns. “This (negative returns on deposits) implies that the current bull run in financial markets is possibly a break from the past as households may have got into the bandwagon of self-fulfilling prophecy of a decent return on their investment,” the report said.

According to the SBI report, in banking sector’s total term deposits, contribution by 40 -million plus senior citizens, who remain much dependent on accrued interest income for meeting most of their fixed expenditure needs, hovers around 20 per cent.

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