NBFC Tax Relief on FD Interest, GST May Be Coming – SARFAESI, Liquidity Demands Rejected

Govt considers partial parity with banks for NBFCs on FD interest and GST treatment; refuses structural changes on liquidity, debt recovery

New Delhi, July 11 – In a move that could partially address regulatory disparities between Non-Banking Financial Companies (NBFCs) and banks, the government is likely to grant limited tax relief to the NBFC sector. According to a senior official, the Finance Ministry is actively reviewing proposals to extend income tax exemptions on fixed deposit (FD) interest for senior citizens and to remove Goods and Services Tax (GST) on co-lending service fees charged by NBFCs to banks. However, broader sectoral demands, including SARFAESI access and refinancing institutions, are likely to be rejected.

Currently, senior citizens enjoy tax exemption on up to ₹1 lakh interest income from bank FDs, but this does not apply to NBFC FDs. The government is now considering extending this benefit to NBFCs, which could increase their competitiveness in retail deposits.

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GST Relief Likely for Co-Lending Fees Charged by NBFCs

NBFCs have also sought GST exemption on co-lending service fees charged to banks under joint lending arrangements. In co-lending, NBFCs originate and manage loans funded jointly by banks and NBFCs. While banks are exempt from GST on service charges, NBFCs must pay 18% GST, leading to margin erosion.

“There is a valid concern here. The GST treatment for NBFCs under co-lending models may be reviewed positively,”
said the government official, signaling potential relief on a long-standing taxation anomaly.

Relief Under Consideration:

• FD interest tax exemption: For senior citizens’ NBFC deposits, up to ₹1 lakh, in line with banks

• GST waiver on co-lending service fees: To match tax treatment of banks in co-origination arrangements

No Relief Likely on SARFAESI, Liquidity Window, or Refinance Facility

Despite these limited concessions, the government has ruled out acceptance of larger structural demands raised by NBFCs. The most contentious is the request to reduce the SARFAESI Act threshold from ₹20 lakh to parity with banks, which currently face no minimum cap.

“Reducing the SARFAESI threshold for NBFCs could flood Debt Recovery Tribunals with small-ticket defaults and potentially expose retail borrowers to harassment,”
the official said. Over 11 lakh DRT cases are already pending.

NBFCs have also demanded a dedicated liquidity window, akin to the RBI’s repo facility for banks, and the establishment of a refinancing body for long-term low-cost capital access in MSMEs, affordable housing, and rural lending. But the government has no plans to concede these.

“Nearly 40% of NBFC funding already comes from banks. Special liquidity lines created during COVID were underutilized,”
the source pointed out.

Limited Gains for NBFCs, No Major Structural Shift

Traders and investors in NBFC stocks should note that short-term sentiment may turn slightly positive for select deposit-heavy NBFCs and fintech lenders with co-lending exposure. However, the larger regulatory overhaul sought by the sector appears unlikely for now.

NBFC Stocks to Watch:

• Bajaj Finance, Shriram Finance, Muthoot Finance – Key FD-focused NBFCs

• L&T Finance, Aditya Birla Capital, UGRO Capital – Active in co-lending partnerships

• LIC Housing, PNB Housing, Aavas Financiers – May remain under pressure on SARFAESI status quo

Macro Context to Track:

• Monsoon-linked rural credit demand

• RBI stance on NBFC regulation in upcoming policy

• FII/DII flows in midcap financials