On February 1, the Finance Minister (FM) will present the Budget for the Financial Year 2025-26.

The Budgets in the last two terms of the present government have benefitted the country macro-economically; however, the middle class mainly comprising the salaried and pensioners, expects some exclusive benefits from the forthcoming Budget.

It is noteworthy that the middle class supports the economy through their consumption demand, savings through banks, small savings schemes and, of late, capital market, and sincere payment of income tax.

Therefore, the middle class deserves some ‘visible’ considerations by the FM, especially relating to their finances, so that it can continue to serve the economy as they have done hitherto.

Bank deposits related

The salaried and retired in the middle class are relatively risk-averse compared to the high income earners and rich or super-rich.

Therefore, they ‘prefer’ to invest their savings in the less risky Fixed Deposits (FDs) of banks.

Moreover, these savers in banks can avail themselves of ‘personal loans’ (e.g., housing, educational and vehicle loans), which, encouraged by the country’s banking authorities, has witnessed runaway growth in the past few decades.

Against this backdrop, it is proposed that the FM should consider exempting the entire interest income from retail bank FDs from income tax, for all.

Currently, u/s 80TTB of the Income Tax Act the senior citizens can claim a deduction of up to ₹50,000 on interest income from several types of deposits. Moreover, the increases in inflation rate justify a hike in the limit.

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 bps to 65 bps in respect of FDs. This has remained static for a long period of time despite inflationary bouts. The extra rate of interest should be raised to 50 bps to 100 bps.

The Budget should direct RBI to 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 with remarkable outcome, requires people to maintain sufficient balances in their SB accounts as they pay their routine bills through internet banking. Otherwise, the account holders are required to pay penalties. Resultantly, banks mobilise low-cost funds at the SB depositors’ cost.

The issue of unclaimed deposits, which seems irresolvable, 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.

The recent unearthing of the Mumbai Torres investment scam shows that the financial literacy endeavours have not succeeded. The Budget should take a serious view of it and direct the RBI to tap the Depositor Education and Awareness Fund and incentivise banks/non-banks to augment their efforts to enhance financial literacy.

Various issues pertaining to reforms in the Deposit Insurance System (DIS) in India was debated in the International Conference of the International Association of Deposit Insurers-Asia Pacific Regional Committee hosted by the Deposit Insurance and Credit Guarantee Corporation on August 14, 2024.

Three RBI deputy governors who addressed the conference highlighted introduction of a risk-based premium system as the most important need at present.

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 that 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 in terms of higher interest rates.

In short, the Budget should appoint a specialist committee to overhaul the DIS, which was introduced in 1961, and make it relevant for modern banking.

All the above-mentioned measures will also help catalyse deposit accretion in banks.

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.

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 annulled and (b) income tax exemption limit for the premium paid be increased significantly.

Public provident fund

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

Besides, there are some operational issues, as given below, that the FM needs to address.

* Withdrawal from the PPF account by its holder be allowed twice, instead of once, in a year. This may be subject to an aggregate limit.

* The withdrawal should be allowed electronically instead of visiting the branch.

In general, the relevance of the current system of fixing interest rates for the entire spectrum of small savings schemes today needs to be re-examined.

Even though the government encourages people to move towards the new method, so long as the old method exists, exemptions cannot be ignored as they go beyond the methods as such. It’s time only one method be provided instead of two.

If these exemptions make the old method more attractive than the new method, the government can tweak the slabs or rates in the new method to maintain its attractiveness.

The writer is a former senior economist, SBI. Views expressed are personal