NBFCs may get tax relief on senior citizens’ FD interest, GST exemption on co-lending fees

The government is considering offering limited tax relief to Non-Banking Financial Companies (NBFCs) in a bid to address long-standing concerns over regulatory parity with banks, a senior government source said. Specifically, the Finance Ministry may examine proposals to extend tax exemption benefits on fixed deposit (FD) interest for senior citizens and provide GST relief on co-lending service fees — two areas where NBFCs have sought equal treatment with banks.

“At present, senior citizens enjoy tax exemption on interest income up to Rs 1 lakh from bank fixed deposits. NBFCs have requested that the same exemption limit be extended to FDs offered by them as well,” the source said. “This demand is under consideration and may be looked at positively.”

NBFCs have also raised concerns regarding the Goods and Services Tax (GST) treatment on co-lending arrangements with banks. In a co-lending model, banks and NBFCs jointly disburse loans to a borrower — typically with banks contributing 80 percent of the loan and NBFCs contributing the remaining 20 percent. While the loan is jointly funded, the NBFC usually originates the loan, handles documentation, and manages recovery. Under this model, NBFCs charge a servicing or management fee to the bank for handling these functions. However, unlike banks, which enjoy exemptions on such service charges, NBFCs are required to pay 18 percent GST on these fees, creating a tax-related cost disadvantage, affecting their margins.

“There is a valid point on the co-lending GST issue. NBFCs want the service fee they receive under co-lending models to be exempt from GST, just like banks. This may be reviewed,” the source added.

No relief on other structural demands

While the NBFC sector, which plays a crucial role in last-mile credit delivery, has demanded equal regulatory treatment with banks, the government is not inclined to entertain several of their structural demands — particularly those related to liquidity access and debt recovery mechanisms.

NBFCs have sought the need for a dedicated liquidity window — similar to the Reserve Bank of India’s repo facility available to banks — as well as the creation of a dedicated refinancing institution. However, these requests are unlikely to be accepted, according to the government source.

“During COVID, some special liquidity windows were created for NBFCs, but they did not work effectively. Today, nearly 40 percent of NBFC lending comes from banks. They already have adequate access to funding channels,” the source said.

NBFCs have also sought the creation of a dedicated refinancing institution that would provide long-term, low-cost funds to support lending operations in priority segments such as MSMEs, affordable housing, and rural credit. While institutions like SIDBI and NABARD offer refinance support to banks and specific sectors, NBFCs argue they lack consistent access to such facilities, despite being key players in credit delivery.

“NBFCs want a dedicated institution from where they can get refinancing. But right now, there is no such plan under consideration,” the source said.

The most contentious issue raised is the demand to reduce the minimum loan threshold under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act from the current Rs 20 lakh. SARFAESI allows lenders to recover their dues by seizing and auctioning the secured assets of a defaulting borrower — without having to go through lengthy court procedures. While banks are permitted to initiate such recovery proceedings regardless of the loan amount, NBFCs can only invoke SARFAESI if the outstanding loan exceeds Rs 20 lakh. NBFCs are demanding that this threshold be removed or reduced, arguing that the current limit restricts their ability to recover smaller loans.

“NBFCs want the SARFAESI threshold removed to allow action against smaller defaulters, just like banks. But if allowed, it will overwhelm Debt Recovery Tribunals (DRTs), which are already dealing with over 11 lakh pending cases,” the source warned. “Such a move could also open the door to harassment of small borrowers.”