Why banks want govt to make fixed deposits up to Rs 5 lakh tax-free

If India’s banks have their way, your next fixed deposit up to Rs 5 lakh could be tax-free.

Banks are seeking a level playing field on garnering funds as they believe they are placed at a disadvantage vis-a-vis mutual funds and insurers that offer tax breaks to customers, according to a report by The Economic Times.

Ahead of the budget, banks have made representations to the finance ministry to make investments in fixed deposits of up to Rs 5 lakh tax-free as they want small-ticket deposits to become competitive with small savings plans and insurance products.

The Indian Banks Association (IBA) made the representation on behalf of banks, which have lately seen deposit growth trail the pace of credit expansion, the report said.

Why is this representation being made now?

The IBA is making this representaiton now as the government gets into budged season and is busy preparing the annual budget which will be unveiled by finance minister Nirmala Sitharama in Feburary. 

At this time of the year, the finance ministry gets into consultaitons with and recieves representations from all stakeholders. 

So, how big is the wedge between credit and deposit growth?

The wedge between credit and deposit growth continued to widen and stood at 9 percentage points at the end of November. While credit expanded at 17%, deposits increased at 8.2%. The pace of deposit growth tumbled in November from 9.5% in October. Total banking deposits are at Rs 173.7 lakh crore, the ET report said.

Credit to deposit ratio has been increasing over the past year, and touched 74.4, climbing more than 5 percentage points in the period.

Despite increase in rates, bank deposits have continued to lose out to insurance schemes, which offer high tax-free returns, and to tax-saver mutual fund plans.

What other reliefs are banks seeking from the government?

Banks have also sought relief on tax paid from gains on one-time settlement schemes.

Another demand for the consideration of the finance ministry relates to the prevalent pension scheme. Nationalised and co-operative banks have sought that the pension scheme be amended and brought under a pay commission-like structure, which gets automatically upgraded periodically. Currently, the pay scales in state-run banks are decided by bipartite settlements between unions and the management.