Why fixed deposits are not that bad anymore

Bank deposit growth, trailing the growth in credit, is expected to get a big boost with depositors being exempted from TDS on interest income up to Rs 40,000 against Rs 10,000 earlier. The interim Budget has raised the threshold limit for TDS obligations in another key area: rental income.Finance minister Piyush Goyal has proposed amendments to sections 194-A and 194-I of the I-T Act. Currently, under Section 194-A, if the interest income from deposits made in banks and post offices exceeds Rs 10,000 in the financial year, the amount is credited to the individual only after deducting tax at the rate of 10%.However, the Budget has quadrupled this value, and deposit holders can enjoy interest incomes up to Rs 40,000 without any tax deductions by the bank or post office.Section 194-I, on the other hand, requires TDS to be deducted on rent paid by any person (other than an individual or HUF not subject to tax audit). This threshold limit has been increased from Rs 1.8 lakh per year to Rs 2.4 lakh per year. Small individual taxpayers who are tenants have to pay TDS under another section if the rent exceeds Rs 50,000 per month.Banks are now expecting more savings to flow into FDs. This fiscal, until January 18, 2019, lenders added Rs 7.5 lakh crore to their outstanding loans, which now stand at Rs 93.31 lakh crore. Against this, their deposit base grew by only Rs 5.6 lakh crore to Rs 119.86 lakh crore. Part of the reason has been the shift to mutual funds and the increase of currency in circulation. According to economists, this is also because banks have become more aggressive in lending after finance companies faced a liquidity crunch during the quarter ended December 2018.The quadrupling of the limit for TDS means that an individual can invest up to Rs 5 lakh in a fixed deposit (assuming 8% return) without the bank deducting tax.The amendment to section 194A is applicable to interest paid out by banks, cooperative societies and the post office. Housing finance companies plan to approach the government for similar relief to them as their depositors are subject to TDS as well.“This was one of the issues in the ‘wish list’ submitted by the Indian Banks Association to the government,” said Sunil Mehta, MD, PNB, and chairman of IBA.The biggest beneficiary of this will be senior citizens – the majority of who do not have taxable income, but yet end up losing money on TDS if they do not file forms for exemption in time. The rest who are liable for income tax will have to factor in their interest earnings while paying tax.Bank deposits are also expected to get a boost from the Pradhan Mantri Kisan Samman Nidhi, which will transfer an annual assured income of Rs 6,000 to up to 12 crore farmers. The money will be transferred directly into the bank accounts of the farmers. Bankers expect that the Jan Dhan Yojana accounts, which are dormant, will get active due to the government’s annual contribution.According to Shanti Ekambram, president, consumer banking, Kotak Mahindra Bank, the tax-relief measures will put approximately Rs 23,000 crore more in the hands of the middle-class, which will give investment and consumption a boost.“Customers who are parking their funds outside banks will come back to banks in view of long-term security of funds,” said Ashok Kumar Pradhan, CEO, United Bank of India.

from Economic Times http://bit.ly/2MKcee5