Shorter bank FDs may get tax breaks | india | Hindustan Times
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Shorter bank FDs may get tax breaks

The government is considering a plan to make it more attractive for individuals to park money in bank deposits by boosting tax breaks.

india Updated: Jan 27, 2012 01:13 IST
Mahua Venkatesh

The government is considering a plan to make it more attractive for individuals to park money in bank deposits by boosting tax breaks.

In the budget for 2012-13, finance minister Pranab Mukherjee is likely to reduce the lock-in period for fixed deposits in banks that become eligible for income tax benefits to three years.

At present, individuals can claim tax exemption under Section 80C of the Income Tax Act for parking money in bank deposits only for thos that come with a five-year tenure or more.

“The proposal is being looked into as it would attract more people to park their money in bank deposits and these also need to get similar treatment as other tax saving instruments,” an official who did not wish to be identified told Hindustan Times.

A five year lock-in condition means that the investor cannot withdraw the deposits before the end of five years. This usually acts a disincentive despite the tax break, especially when there are more liquid options such as systematic investment plans (SIP) of mutual funds that offer similar tax benefits, but with lock-in of three years.

The move would also help boost the banks’ deposit base.

Bankers said it is imperative to offer similar norms as they have clamour against a host of instruments to woo customers to park money with them.

Under present norms, individuals can claim deductions under Section 80C upto ceiling of Rs 1 lakh and can choose among a host of savings instruments such as mutual funds, public provident fund and insurance premium to spread out their tax planning investments.

In a recent pre-budget meeting with finance minister Pranab Mukherjee, top executives of banks told the government in clear terms that immediate steps were required to encourage people to park with banks.

At present, total bank deposits account for only a third of India’s total savings, which totals about 33% of India’s GDP.

"There is a need for removal of handicaps which banks face in mobilising the deposits," said a finance ministry official.

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