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Your investment in bank FDs may help you save more taxes

business Updated: Feb 19, 2015 07:53 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times
Financial savings

You may find it more attractive to park your savings in banks from next year. The government is likely to offer tax incentives to bank fixed deposits on par with mutual funds - a move aimed to deepen financial savings and wean people away from investing extra money in unproductive assets such as gold.

An announcement to this extent could be made by finance minister Arun Jaitley in the forthcoming budget on February 28.

To begin with, investments on bank FDs on which tax incentives can be claimed will likely come with a lower lock-in period of three years against the current five years.

Bank FDs as a savings instrument has not emerged as a hot preferred option because of a high lock-in period and greater tax payout compared to other peer group asset classes such as mutual funds and Public Provident Fund (PPF) within the popular "Section 80 (C)" instruments.

Under current rules, tax deductions can be claimed on investments in bank FDs only if these are locked-in for five years. While, tax breaks can be claimed on the principal and also at the stage of withdrawal on maturity, the interest earned during the tenure is taxed.

This puts bank FDs at a disadvantage compared to mutual funds that come with a three-year lock-in clause. Besides, the gains made on mutual fund investment during the lock-in period are not taxed.

Bank FDs, despite convenience of easier liquidity, are also losing out to physical valuables such as gold and paintings.

Last month, Prime Minister Narendra Modi had asked banks to create products to wean people away from parking surplus funds in gold.

More bank deposits, besides pushing the overall savings rate, also acts as a counter to India's infamous parallel and bustling cash economy.

"There is an urgent need to chalk out ways to incentivise public savings and a category of deposits can be created and brought under the EEE (exempt-exempt-exempt) structure, this would also wean away people from investing in gold," said Soumya Kanti Ghosh, chief economic adviser, SBI.

EEE refers to a structure where savings are not taxed at all three stages - investment, accumulation and withdrawal.

"We are looking at ways that would boost deposits of banks... this would also help in propping up the country's savings rate," a senior government official who did not wish to be identified told HT.

India's savings rate, which had peaked at 36.8% of GDP in 2008, has fallen to about 30% of GDP currently.

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