Retail depositors are earning negative returns on their bank deposits and hence, there is a need for reviewing taxes on interest earned, State Bank of India (SBI) economists have said.
If not for all the depositors, the taxation review should be carried out for at least the deposits made by senior citizens who depend on the interest for their daily needs, the economists led by Soumya Kanti Ghosh said in a note, which pegged the overall retail deposits in the system at Rs 102 lakh crore.
At present, banks deduct tax at source at the time of crediting interest income of over Rs 40,000 for all the depositors, while for senior citizens the taxes set-in if the income exceeds Rs 50,000 per year. As the policy focus has shifted to growth, the interest rates are going down in the system which pinches a depositor.
“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,” the note said.
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, it added further.
“We thus believe, it is now the opportune time to revisit the taxation of interest on bank deposits, or at least increasing the threshold of exemption for senior citizens,” the note said.