On July 23, the Finance Minister will present the full Budget for the remaining period of the current financial year. The Interim Budget was tabled on February 1. Although the budgets in the last two terms of the present government have benefited the country, yet the middle class, which mainly comprises salaried class and pensioners, expects some more benefits from the forthcoming Budget.

This piece suggests a few middle class-friendly proposals relating to the financial sector which the Finance Minister may consider.

Bank deposits

The socio-economic lifestyle of the vast middle class in India is complex and full of daily struggles. The ground-level “sociology” of the middle class households needs to be understood for framing economic policies for them.

For instance, even after their retirement from jobs, middle class parents have to still look after not only themselves but also their children, as the employment situation for the latter is grim, and very few retirees get work opportunities. Post-retirement, being no longer risk-lovers, the retirees mostly put their retirement benefits in the less risky fixed deposits (FDs) of the public sector banks, the latter being perceived as safer than any other bank categories.

Against this backdrop, it is proposed that the Finance Minister considers exempting the entire interest income from retail bank FDs from income tax, for all. Currently, under Section 80TTB of the Income Tax Act senior citizens can claim a deduction of up to ₹50,000 on interest income from several types of deposits.

How much tax the government earns from interest income from retail bank FDs is not publicly known and hence, the Central Board of Direct Taxes should publish this data.

Senior citizens get some extra interest over and above the interest rate for the general public. The additional interest rate usually ranges from 25 basis points (bps) to 65 bps in respect of FDs. This has remained static for a long period of time including the inflationary periods. The extra rate of interest should be raised to 50-100 bps.

Moreover, the high interest rate that banks are offering now will likely reduce soon, and, it is not advisable for the middle class, especially the risk averse, to jump into capital markets, directly or indirectly via mutual funds.

The RBI should evaluate the impact of deregulation of Savings Bank (SB) interest rate, which was introduced in 2011. This has distorted the SB market, increased the volatility of SB deposits, and proliferated unclaimed accounts and deposits via bank hopping by depositors.

At the same time, digital banking, which is impressively progressing, requires several to maintain sufficient balances in their SB accounts as they pay their routine bills through internet banking. During 2019-20 to 2022-23, the SB deposits with commercial banks grew at a Compound Annual Growth Rate (CAGR) of 11.1 per cent as against 8.6 per cent during 2016-17 to 2019-20.

Consequently, banks mobilise low-cost funds at the SB depositors’ cost.

The issue of unclaimed deposits has remained sticky despite endeavour by banks and RBI, as illustrated in the Chart.

Considering the inheritance laws in the country and the burgeoning ‘no-nomination’ accounts of the past, the problem calls for legal solutions. The Budget needs to direct the Ministry of Law and Justice to collaborate with the law departments of banks as well as RBI to find solutions.

The Depositor Education and Awareness Fund (DEAF) has been in existence since 2014, and banks are transferring their unclaimed deposits into it rather robotically. It is proposed to wind up the practice and ‘incentivise’ banks to carry out the task, on a mission mode, at the ground level where they operate. Let there be a Lok Adalat kind of approach which the commercial bankers are best suited to carry out.

Protecting the money of the depositors, even after their death or a bank’s liquidation, is the dharma of the government, the RBI as well as banks. Viewed in this perspective, deposit insurance plays a significant role, worldwide. Reforms in the Deposit Insurance System in India, which was introduced in 1961, needs to be overhauled in order to make it relevant for modern banking.

For instance, it is ridiculous why the Domestic-Systemically Important Banks (D-SIBs) and other perceived Too-Big-To-Fail (TBTF) banks should pay the same premium as a small, rickety co-operative bank pays (currently, 12 paise per annum per ₹100 of deposits). If a risk-adjusted premium system is introduced, then the D-SIBs and TBTF banks would definitely pay less premium than others, and they can pass on the saved premium to their retail depositors by way of higher interest rates.

Health insurance

Post-pandemic, people have become more health conscious, but, at the same time, the cost of treatment has increased manifold. So is the demand for health insurance. During 2019-20 to 2022-23, the health insurance premium underwritten by general and health insurers grew at a CAGR of 20.8 per cent as against 18.6 per cent during 2016-17 to 2019-20.

The premium on health policies have remained high, especially for critical illness. It is proposed that (a) Goods and Services Tax (GST) on the premium be reduced, (b) income tax exemption limit for the premium paid be increased, and (c) a ‘no claim bonus’ system be introduced, if an insured person doesn’t make any claim in a year.

Credit cards offering encashment of accumulated loyalty points charge GST on the amount credited to the card-holder’s account. The encashment being just an accounting entry done by a few clicks, it’s perplexing why GST is charged on it.

Public Provident Fund

The Public Provident Fund (PPF) limit has remained stagnant at ₹1.5 lakh during a year for a fairly long time. PPF acts as a ‘safety net’ for the salaried class, especially after retirement. The limit needs to be raised to at least ₹2 lakh.

Das is a former senior economist, SBI, and Rath a former central banker. Views are personal

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