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Budget 2012: Bankers demand tax break on interest earned from FDs
January, 20th 2012

Bankers on Thursday pitched for removal of tax deducted at source (TDS) levied on interest accrued from fixed deposits, to promote savings.

"Bank deposit beyond three years should be treated as capital. We have asked for three years (fixed deposit tenure) ...that's a view," SBI Chairman Pratip Chaudhuri said after bankers' pre-Budget consultations with Finance Minister Pranab Mukherjee here.

"Now in bank deposit if a depositor has given the PAN number, then in no way deposit interest can escape from income tax net. So, anybody who has furnished the PAN number, should not have to pay any TDS because that interest would any way be captured into income," he suggested.

TDS is charged if earnings from interest is Rs 10,000 or more. In India, he said, the bank credit to GDP ratio is very low at 45 per cent.

"There is need to improve the ratio. If bank credit to GDP ratio goes up, it would lead to higher output, employment and taxes, he added.

Demanding a tax break on earnings from term deposits, Chaudhuri said: "We have asked for a level-playing field with debt mutual fund. Level-playing field means a that bank deposit interest for deposit of five years should be given the status of a capital.

"Because if you put money in a debt mutual fund which is also investing in debt instruments after one year it becomes capital".

Indian Overseas Bank Chairman and Managing Director M Narendra said banks have requested government for tax exemption and increasing TDS limit. There is a case for increasing the credit to GDP ratio in India which is one of the lowest in the world, Narendra said.

Another suggestion, Chaudhuri said, "we have made, whatever loan loss provisions we make, so long as they are in conformity with what RBI prescribed and prudent provisioning, that should be fully allowed as deduction for income tax.

"Today overall cap of 7.5 per cent of the total loans should be done away with. It should be made simple. It is a genuine business cost," he said.

It was mentioned that savings rate is about 32 per cent but only one third of it reaches banks. Therefore, there is a need for removal of handicaps which banks face in mobilising the deposits. In view of the high costs of education, it was said that it will be useful if education loan guarantee scheme could be launched, bankers suggested.

Bankers also suggested that there should be a separate taxation window for pension funds and long-term funds. A demand was also made to make banks eligible entities to issue tax free infrastructure bonds. Bankers also highlighted the requirement for special incentives for investors to invest in infrastructure bonds.

Kotak Mahindra Bank Managing Director Uday Kotak said, "We have suggested steps which support flow of domestic savings into equity specially into mutual fund, insurance, and also reduction of transaction tax on cash settled equities. That can be done by reducing securities transaction tax (STT) on cash equity."

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