The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.
ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.
1. Use losses in stocks to cut tax
Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.
At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.
How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60,000.
Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.
2. Get deduction for rent even without HRA
House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. “Not many people are aware of this deduction,” says chartered accountant Mehul Sheth. But there are stiff conditions to be met. The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.
Besides, he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Whew. Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction. This means, you can pay a senior citizen parent up to Rs 3.43 lakh a year.
How much tax can you save: Given the stiff conditions, one can’t claim more than Rs 2,000 as deduction per month under Sec 80GG. But this can bring down your tax by Rs 7,400 a year in the highest tax bracket.
Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA.
3. Pay lower tax if someone is ill
The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at Rs 60,000 if the patient is a senior citizen,” says chartered accountant Paras Savla. The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson’s disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings. However, there are a few conditions.
The patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by the employer or an insurance company, there is no deduction. If the taxpayer gets a partial reimbursement of the expenses, the balance can be claimed as deduction.
How much tax can you save: If a dependent is a patient, the taxpayer’s liability comes down by 12,360 in the highest income bracket. If the patient is a senior citizen, the tax is lower by Rs 18,540.
Proof required: One needs a certificate of the illness from a specialist in a government hospital.
4. Claim benefits for your political affiliations
Can you lower your tax if you have political connections? Apparently you can. Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). “This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections,” says Sheth. Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction. Of course, the deduction is available only if the donation went into the party coffers.
Cash given to individuals doesn’t count. Other donations also get you tax benefits. Under Section 80G, donations to charitable organizations get deduction ranging from 50% to 100%. It’s a good idea to know how much deduction would be available before you write a cheque. However, There is a ceiling to the deduction a taxpayer can claim in a year. “The quantum of deduction is limited to 10% of the gross total income of the donor,” says Tapati Ghose, partner at Deloitte Haskins & Sells. Also, only cash donations are taken into account. Food, clothes and medicines do not qualify.
How much tax can you save: In the highest tax bracket, a donation of Rs 1 lakh to a political party can bring down your tax by Rs 30,900.
Proof required: You must have a stamped receipt of the payment from the political party.
5. Use education loan to lower tax
The rising cost of higher education is forcing people to borrow money to pay the fee of their children’s professional courses. The taxman is sympathetic and offers a deduction that can lower the cost of the loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. “If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid,” says Shanbhag.
However, loans taken for siblings and other relatives do not qualify. Also, the lender must be a recognised financial institution; loans from employers or individuals do not count.
How much tax can you save: If you take a Rs 10 lakh education loan at 10% interest for 8 years, you can save Rs 1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.
Proof required: Loan statement from lender.
6. Disabilities can be tax savers
There are other signs to suggest that the taxman is not the heartless Scrooge he is often made out to be. If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings.
Incidentally, the deduction is offered as a lump sum and does not depend on the actual amount that the taxpayer may spend on himself or on the disabled dependent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for the disability under Section 80U separately.
How much tax can you save: A deduction of Rs 75,000 can cut tax by Rs 23,175 in the highest tax bracket. In case of severe disability, the tax is lower by Rs 30,900.
Proof required: A certificate of disability from a civil surgeon or the chief medical officer of a government hospital.
7. Take unlimited deduction for your second home loan
When it comes to buying a second house, the taxman can be very encouraging. Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. As Savla says, “If you have more than one house, any one is deemed to be rented out. So the interest income on the home loan for that house can be claimed entirely for deduction, provided the rental income or a deemed income is charged to tax.”
How much tax can you save: If you have taken a home loan of Rs 50 lakh at 9.5% for 20 years, your interest payment in the first year will be Rs 4.7 lakh and you can save tax up to Rs 1.09 lakh.
Proof required: Loan account statement from your lender
8. Claim HRA as well as home loan benefits
But you can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. You can’t be doing both at the same time. But this is a gray area in the Income Tax Act. “In legal terms, silence signifies approval.
In other words, the Act need not expressly allow something. The lack of express disallowance also signifies intention of approval,” says Shanbhag. So given this, HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. As Shanbhag puts it, “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to.”
There are many such examples in the tax laws. Let’s take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). “Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?” asks Shanbhag.
How much tax can you save: In the highest tax bracket, a deduction for Rs 1.5 lakh will bring down your tax by Rs 46,350.
Proof required: Loan account statement from your lender
Tuesday, January 25, 2011
How to choose the right health plan
Medical costs are ballooning by the day, even a minor surgery can cost you anywhere between Rs 20,000 and Rs 50,000. Similarly, a cardiac treatment can set you back by Rs 5 lakh, depending upon the city and the hospital you choose.
Save, invest, do whatever you want, there can be no dispute over the need for mediclaim to offset the impact of rising healthcare costs. Given the plethora of options in the health insurance space, it is difficult to make a rational choice.
With life insurance companies entering the health insurance space, customers are spoilt for choice. ET chalks out the differences between traditional mediclaim policies offered by general insurers and the new generation health covers offered by life insurers. Here’s a low-down on the key components of a comprehensive mediclaim:
There are two kinds of medical policies available in India. The first is the indemnity policy, which is the traditional mediclaim policy that general insurers offer. These are largely reimbursement plans, which cover expenses related to hospitalisation.
The claims are settled by the insurer either on a cashless basis through a tie-up with hospitals or by reimbursing bills. Then, there are defined benefit plans, offered by life insurers, which include critical illness policies and payment of a lump sum on the diagnosis of any of the named critical illnesses in the policy document.
“If the insurance company is stipulated to pay Rs 5,000 for a certain critical illness, the company will pay Rs 5,000 irrespective of the size of the claim,” says Rahul Aggarwal, CEO, Optima Insurance Brokers. However, critical illnesses such as cancer, stroke, renal failure or major organ transplants are not standardised and may vary from insurer to insurer. However, the insurers will not cover any of these illnesses if they get diagnosed within 90 days from the effective date of the policy.
“The premiums of both versions of health covers are comparable but life insurers still outsource the service of claim settlement to TPAs.
Among general insurers, most private sector companies have changed this practice and carry out the claim servicing business within the company itself. In a way, the company becomes directly responsible for claim settlement.
Earlier, even when the TPAs carried out the business of claims servicing, the onus was on the insurer to ensure a hasslefree claim settlement for the policyholder,” says Sanjay Datta, head, Health Insurance, ICICI Lombard General Insurance.
“The main difference between health covers offered by general insurers and those of life insurers is the tenure of the cover. The mediclaim has to be renewed annually whereas health covers (offered by life insurers are renewable after three years or more, depending upon the choice of insurance and insurance company).
The premiums are likely to remain unchanged in the three-year period. If the insurer wants to increase the premium within three years, the insurer has to seek the approval of Insurance Regulatory and Development Authority (Irda). If the insurer wants to increase the premium after three years, it works like a regular mediclaim policy which usually revises premiums on an annual basis,” Binay Kumar Agarwala, senior V-P, health business, ICICI Prudential.
Size matters:
You should look at the annual limit of your policy. According to experts, if you hail from a small- or mid-sized town you should look at a cover of Rs 2-3 lakh. If you reside in a metro, then you should not look at covers less than Rs 4-5 lakh.
Insurers have introduced sub limits in mediclaim policies to tackle the rise in healthcare costs. The most common sub-limits are room rents, doctors’ fees and diagnostics.
If you have a sum insured of Rs 1 lakh and the insurer has capped your room rent at 1-1.5% of the sum insured then your room rent cannot exceed Rs 1,000. If it exceeds the specified amount, then you have to pay the balance from your pocket.
“If there is a sublimit on the room rent or the doctors’ fees, the ultimate payout will be much lesser than the sum assured,” Datta adds. Similarly, insurers also impose a sub-limit on doctors’ fee at 25-30% of the bill amount. Check to see that the policy states the date the policy will begin paying (some have a waiting period before the cover begins) and what is covered or excluded from coverage. Moreover, it always makes sense to have an additional mediclaim even if you are covered under your employer’s mediclaim scheme.
This refers to the portion of claim that a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. “Co-payments happen only in certain reimbursement covers to make the insured more responsible for judicious payments. This clause is seen mostly in health covers designed for senior citizens. It is also common in group mediclaim covers offered by employers, which covers the employees and his/her family members. The co-payment clause is applicable mostly to the family members of the employee,” Aggarwal adds.
The pre-existing diseases clause:
There are mediclaim covers which do not cover pre-existing diseases for four years whereas some which do not cover it for three years. Similarly, ensure there is no ambiguity in the renewal clause of the policy. For example, under an individual mediclaim policy, Apollo Munich covers pre-existing diseases after three continuous policy years. The New India Assurance, on the other hand, covers pre-existing diseases only after four years and covers hypertension and diabetes only if you pay extra premium.
The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual who has signed up for an adequate sum assured. Moreover, you will know how much you will earn from your cover in advance.
Similarly your mediclaim could have caps and limits, which can be well augmented by the health cover. But that doesn’t imply that a stand alone health cover can substitute a mediclaim in your financial kitty,” Aggarwal adds. You can top up your existing mediclaim if you want to increase the sum assured. Indemnity or reimbursement cover should be the ideal base cover for any policyholder as that would come close to the final bill amount of the hospital.
But there are various expenses which include commuting to the hospital, buying medicines post hospitalisation and so on, that fall outside the purview of a traditional reimbursement plan. In such cases, you could top up a traditional reimbursement plan with a defined benefit plan to be able to tackle all the medical-related expenses. After all you have the option of claiming a tax benefit of up to Rs 15,000 under Section 80D.
General insurers
General insurance companies offer indemnity policies or reimbursement health plans Mediclaim has to be renewed on an annual basis. The company can increase the premium at renewal Look for the clause on sub-limits. The most common sub-limits are room rents, doctors’ fees and diagnostics Individuals from a small town should go for a cover of Rs 2-3 lakh, and in metros up to Rs 5 lakh.
Life insurers
Defined benefit plans, mostly offered by by life insurers, pay a lump sum on the diagnosis of any of the named critical illnesses listed in the policy document Insurers usually do not cover the specified critical illnesses if they are diagnosed within 90 days from the effective date of the policy Premiums are usually revised at renewal, which is usually three years or more If the company wants to increase the premium within three years, the insurer has to seek Irda’s approval.
Save, invest, do whatever you want, there can be no dispute over the need for mediclaim to offset the impact of rising healthcare costs. Given the plethora of options in the health insurance space, it is difficult to make a rational choice.
With life insurance companies entering the health insurance space, customers are spoilt for choice. ET chalks out the differences between traditional mediclaim policies offered by general insurers and the new generation health covers offered by life insurers. Here’s a low-down on the key components of a comprehensive mediclaim:
There are two kinds of medical policies available in India. The first is the indemnity policy, which is the traditional mediclaim policy that general insurers offer. These are largely reimbursement plans, which cover expenses related to hospitalisation.
The claims are settled by the insurer either on a cashless basis through a tie-up with hospitals or by reimbursing bills. Then, there are defined benefit plans, offered by life insurers, which include critical illness policies and payment of a lump sum on the diagnosis of any of the named critical illnesses in the policy document.
“If the insurance company is stipulated to pay Rs 5,000 for a certain critical illness, the company will pay Rs 5,000 irrespective of the size of the claim,” says Rahul Aggarwal, CEO, Optima Insurance Brokers. However, critical illnesses such as cancer, stroke, renal failure or major organ transplants are not standardised and may vary from insurer to insurer. However, the insurers will not cover any of these illnesses if they get diagnosed within 90 days from the effective date of the policy.
“The premiums of both versions of health covers are comparable but life insurers still outsource the service of claim settlement to TPAs.
Among general insurers, most private sector companies have changed this practice and carry out the claim servicing business within the company itself. In a way, the company becomes directly responsible for claim settlement.
Earlier, even when the TPAs carried out the business of claims servicing, the onus was on the insurer to ensure a hasslefree claim settlement for the policyholder,” says Sanjay Datta, head, Health Insurance, ICICI Lombard General Insurance.
“The main difference between health covers offered by general insurers and those of life insurers is the tenure of the cover. The mediclaim has to be renewed annually whereas health covers (offered by life insurers are renewable after three years or more, depending upon the choice of insurance and insurance company).
The premiums are likely to remain unchanged in the three-year period. If the insurer wants to increase the premium within three years, the insurer has to seek the approval of Insurance Regulatory and Development Authority (Irda). If the insurer wants to increase the premium after three years, it works like a regular mediclaim policy which usually revises premiums on an annual basis,” Binay Kumar Agarwala, senior V-P, health business, ICICI Prudential.
Size matters:
You should look at the annual limit of your policy. According to experts, if you hail from a small- or mid-sized town you should look at a cover of Rs 2-3 lakh. If you reside in a metro, then you should not look at covers less than Rs 4-5 lakh.
Insurers have introduced sub limits in mediclaim policies to tackle the rise in healthcare costs. The most common sub-limits are room rents, doctors’ fees and diagnostics.
If you have a sum insured of Rs 1 lakh and the insurer has capped your room rent at 1-1.5% of the sum insured then your room rent cannot exceed Rs 1,000. If it exceeds the specified amount, then you have to pay the balance from your pocket.
“If there is a sublimit on the room rent or the doctors’ fees, the ultimate payout will be much lesser than the sum assured,” Datta adds. Similarly, insurers also impose a sub-limit on doctors’ fee at 25-30% of the bill amount. Check to see that the policy states the date the policy will begin paying (some have a waiting period before the cover begins) and what is covered or excluded from coverage. Moreover, it always makes sense to have an additional mediclaim even if you are covered under your employer’s mediclaim scheme.
This refers to the portion of claim that a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. “Co-payments happen only in certain reimbursement covers to make the insured more responsible for judicious payments. This clause is seen mostly in health covers designed for senior citizens. It is also common in group mediclaim covers offered by employers, which covers the employees and his/her family members. The co-payment clause is applicable mostly to the family members of the employee,” Aggarwal adds.
The pre-existing diseases clause:
There are mediclaim covers which do not cover pre-existing diseases for four years whereas some which do not cover it for three years. Similarly, ensure there is no ambiguity in the renewal clause of the policy. For example, under an individual mediclaim policy, Apollo Munich covers pre-existing diseases after three continuous policy years. The New India Assurance, on the other hand, covers pre-existing diseases only after four years and covers hypertension and diabetes only if you pay extra premium.
The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual who has signed up for an adequate sum assured. Moreover, you will know how much you will earn from your cover in advance.
Similarly your mediclaim could have caps and limits, which can be well augmented by the health cover. But that doesn’t imply that a stand alone health cover can substitute a mediclaim in your financial kitty,” Aggarwal adds. You can top up your existing mediclaim if you want to increase the sum assured. Indemnity or reimbursement cover should be the ideal base cover for any policyholder as that would come close to the final bill amount of the hospital.
But there are various expenses which include commuting to the hospital, buying medicines post hospitalisation and so on, that fall outside the purview of a traditional reimbursement plan. In such cases, you could top up a traditional reimbursement plan with a defined benefit plan to be able to tackle all the medical-related expenses. After all you have the option of claiming a tax benefit of up to Rs 15,000 under Section 80D.
General insurers
General insurance companies offer indemnity policies or reimbursement health plans Mediclaim has to be renewed on an annual basis. The company can increase the premium at renewal Look for the clause on sub-limits. The most common sub-limits are room rents, doctors’ fees and diagnostics Individuals from a small town should go for a cover of Rs 2-3 lakh, and in metros up to Rs 5 lakh.
Life insurers
Defined benefit plans, mostly offered by by life insurers, pay a lump sum on the diagnosis of any of the named critical illnesses listed in the policy document Insurers usually do not cover the specified critical illnesses if they are diagnosed within 90 days from the effective date of the policy Premiums are usually revised at renewal, which is usually three years or more If the company wants to increase the premium within three years, the insurer has to seek Irda’s approval.
Home loan rates set to soar to double digits
Planning to take a home loan? Be prepared to shell out double-digit interest rates soon. Lenders say it's only a matter of time before they are forced to pass on the higher cost of funds to borrowers after the Reserve Bank of India increased key policy rates by 25 basis points on Tuesday.
The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a "dominant concern". The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.
At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates. The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1 lakh crore from RBI on a daily basis.
"The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits," said HDFC chairman Deepak Parekh . He pointed out that top corporates were already borrowing at 10% and more.
Higher interest rates should be good news for depositors, though their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. Rising interest rates could also restrain real estate prices in the medium term by tempering demand.
Unveiling its quarterly monetary policy review, the RBI on Tuesday hiked the repo and reverse repo, the rates at which it lends to and borrows from banks, to 6.5% and 5.5% respectively. According to bankers, the 25 basis point hike was a moderate step and by itself not disruptive to growth.
Most banks were expecting that the central bank would take further measures to ease liquidity. Many in the financial sector expected the rate hike to be in the order of 50 basis points. "Going forward, higher demand-side pressures emanating from generalized inflation are likely to surface. Not taming inflation could act as an impediment to the economy's 8-9% medium term growth rate objective," said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group .
What ought to worry borrowers is that RBI has told banks in no uncertain terms that they must slow down lending. The biggest concern for the central bank now is that in the third quarter, banks have lent more money than they raised in the form of deposits.
Banks have been at pains to explain this, they had surplus funds from the previous fiscal, were raising funds through issue of bonds, and some of the large loans to telecom and oil companies were a blip in loan growth. However, there is a fear that the 24% growth in bank credit is adding to consumption demand which is one of the drivers of inflation.
"We have definitely moved into a higher rate environment. Globally there are concerns over inflation and there is domestic pressure on rates," said Shikha Sharma, MD, Axis Bank . According to M V Nair, chairman, Union Bank of India , "The intent of the policy is clear. Lending rates should go up, but how much and when would be determined by each bank."
The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a "dominant concern". The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.
At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates. The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1 lakh crore from RBI on a daily basis.
"The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits," said HDFC chairman Deepak Parekh . He pointed out that top corporates were already borrowing at 10% and more.
Higher interest rates should be good news for depositors, though their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. Rising interest rates could also restrain real estate prices in the medium term by tempering demand.
Unveiling its quarterly monetary policy review, the RBI on Tuesday hiked the repo and reverse repo, the rates at which it lends to and borrows from banks, to 6.5% and 5.5% respectively. According to bankers, the 25 basis point hike was a moderate step and by itself not disruptive to growth.
Most banks were expecting that the central bank would take further measures to ease liquidity. Many in the financial sector expected the rate hike to be in the order of 50 basis points. "Going forward, higher demand-side pressures emanating from generalized inflation are likely to surface. Not taming inflation could act as an impediment to the economy's 8-9% medium term growth rate objective," said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group .
What ought to worry borrowers is that RBI has told banks in no uncertain terms that they must slow down lending. The biggest concern for the central bank now is that in the third quarter, banks have lent more money than they raised in the form of deposits.
Banks have been at pains to explain this, they had surplus funds from the previous fiscal, were raising funds through issue of bonds, and some of the large loans to telecom and oil companies were a blip in loan growth. However, there is a fear that the 24% growth in bank credit is adding to consumption demand which is one of the drivers of inflation.
"We have definitely moved into a higher rate environment. Globally there are concerns over inflation and there is domestic pressure on rates," said Shikha Sharma, MD, Axis Bank . According to M V Nair, chairman, Union Bank of India , "The intent of the policy is clear. Lending rates should go up, but how much and when would be determined by each bank."
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