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Interest on bank deposits likely to be tax exempt
February, 17th 2007

To boost deposit growth, finance minister P Chidambaram may offer deduction on interest earned from bank deposits up to Rs 15,000. FM is likely to restore the provision under 80L of the I-T Act that allows deduction for interest on bank deposits up to Rs 12,000.

With retail investors channelling their savings to the capital markets and mutual funds, the growth rate in bank deposits has slackened. Given that deposit this fiscal grew just 22%, even on the back of a credit offtake of 31%, the finance ministry is considering these tax sops on deposits.

To help banks mobilise deposits, the government may also consider, increasing the TDS ceiling on fixed deposits to Rs 10,000 from Rs 5,000.

Interest on bank deposits used to be allowed as a deduction, subject to a ceiling of Rs 12,000 per annum under section 80L of the I-T Act. The exemption was withdrawn in the Finance Act, 2005. The Indian Banks Association has recommended restoration of that exemption and at a higher ceiling of Rs 15,000. Reintroduction of 80L can be considered to make bank deposits attractive, a government source said.

We want banks to build on low-cost deposits. One way to encourage this would be to consider exempting the interest income from these deposits from the purview of I-T. This will make savings bank deposits an attractive option for the public, the source said.

Savings bank deposits constitute a major portion of bank deposits in rural areas. As per RBI directive, such deposits earn 3.5% interest which is subject to I-T. With current inflation level over 6%, the real return from these deposits is negative. Further, small amounts of interest accruing on savings account deposits are difficult to keep track of for a host of individual taxpayers. Exempting interest income on small deposits would remove this too.

The government is planning to bring down the lock-in for tax breaks on fixed deposits to three years from the current five years. The Centre is also considering raising the ceiling for tax deduction at source (TDS) on interest income from fixed deposits in public sector banks to Rs 10,000. Under current guidelines, banks have to deduct TDS on the interest paid to depositors if it is more than Rs 5,000 in a given financial year.

While the revenue department may not favour restoring tax exemptions, the government has to balance such norms of propriety with the economys growth requirements.

To give consolidation in the banking sector a leg up, the industry has sought tax incentives on M&As to be extended to cover voluntary takeovers by private banks, foreign banks and even urban cooperative banks to create a level-playing field.

The tax break will enable a private sector bank, which acquires an ailing bank, to set off carry forward losses of target bank against its own profits. The tax break is available to a state-owned bank that takes over a loss-making public sector bank or a private bank.

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