Banks request Govt to reduce tax-saving deposit term

Mumbai: The government has once again been requested by the banks so as to cut down on the duration of the tax-saving term-deposit scheme to three years from the ongoing five years.

They have justified about this step saying that the resources so raised not only support infrastructure lending that has gained traction over the last one year or so, but also suitably address the duration mismatch between assets and liabilities.
Banks have not been able to have more development in mobilizing funds under the tax-saving term-deposit scheme. Given that they could miss out on higher returns should interest rates head north, savers perceive the five years lock-in as too long a duration to commit funds.

“The tax savings term-deposit scheme in the current form is not favoured by savers as funds get locked in for five years. As premature withdrawal of the deposit is not allowed, the saver will have to forego an opportunity to earn better returns in case interest rates go up. Further, loan/overdraft against these deposits is not available,” said Mr K. Unnikrishnan, Deputy Chief Executive, Indian Banks' Association.

If the duration is reduced to three years, it would also result in the savers to willingly deposit their money in the tax-saving term-deposit scheme. A similar representation had been made by banks to the Finance Ministry last year also.

Around 8.5 percent interest is paid by all the banks on tax-saving term deposits.

According to the Bank Term Deposit Scheme, 2006, deduction is available on investments under Section 80C of the Income-Tax Act, 1961, on investments (minimum of 100 and up to a maximum of 1 lakh a year) in term deposits of five years' maturity in a scheduled bank.

Under Section 80C, premium towards life insurance and unit-linked insurance plans, subscription to public-provident fund, employee's contribution to provident fund, investment in National Savings Certificate and equity-linked savings scheme, and repayment of principal amount in a home loan qualify for deduction (up to a maximum of 1 lakh a year) from a taxpayer's gross total income.