Let’s relieve savers of their tax burden on bank deposits

Is it time to put a special tax dispensation in place for interest on bank deposits? This may sound antithetical to the government’s approach so far of running an alternative income tax regime in parallel that levies lower rates but without exemptions or concessions.

- MADAN SABNAVIS

Yet, there is a compelling case to rework how income from deposits is taxed.

Deposits should not be seen as just a part of the banking business guided by market forces. Critical contributions are made to nation building by the deployment of these funds. First, banks are mandated to maintain a statutory liquidity ratio, whereby they must invest 18% of deposits in government paper. The ability to invest in government security auctions is contingent on how these deposits grow. Almost 35% of government borrowing is funded by banks, and these funds support various schemes.

Second, bank regulation also mandates that 4.0% of all money lent should be to the ‘priority sector.’ Therefore, after keeping aside ¥22 of every %100 in deposits for SLR and CRR (cash reserve ratio), 40% of the *78 left must be lent to farm-sector borrowers, MSMES, affordable housing projects, among others. This leaves banks with only %47 for discretionary lending. Intuitively, it is clear that if growth in deposits slows down, banks would have less money to subscribe to government paper or meet social objectives through priority-sector credi