Deposit mobilisation by banks will get an impetus with the Finance Minister, Mr P. Chidambaram, allowing investment made in term deposits of scheduled commercial banks with maturity of not less than five years to be eligible for deduction under Section 80C of the Income-Tax Act.
Section 80C provides for deduction up to Rs 1 lakh in specified instruments by individuals or Hindu undivided families. These include investment in insurance premia, contribution to provident fund and purchase of infrastructure bonds.
"There is a demand that fixed deposits of certain tenure should qualify for tax exemption. I proposed to include investment in fixed deposits in scheduled banks for a term of not less than five years in Section 80C of the I-T Act," the Finance Minister said in his Budget speech. The amendment will take effect from April 1, 2006, and therefore apply to the assessment year 2007-08.
The request to bring long-term deposits with banks under Section 80C had been one of the major demands of the banking industry during the run-up to the Budget. During their pre-Budget meeting, top bankers had pointed out to the Finance Minister that despite a major pick-up in credit growth, there has not been a commensurate growth in the deposit base.
"Our stand is vindicated. We wanted bank deposits to be brought under Section 80C. This is a very positive step," Mr S. C. Gupta, Chairman and Managing Director, Punjab National Bank (PNB).
Mr K. N. Prithviraj, CMD, Oriental Bank of Commerce, said that the move to bring bank deposits under Section 80C would increase the flow of deposits. "Bank deposits were slowly losing their sheen. The move would help in attracting deposits," he added.
The Finance Minister has said that special securities issued by the Government since 1993-94 to re-capitalise the public sector banks would soon be converted into tradable, dated securities that could qualify for statutory liquidity ratio purposes. The net capital support to banks through special securities and other perpetual securities stands at Rs 22,808 crore.
Mr Chidambaram has said that the move would "facilitate increased access of the banks to additional resources for lending to the productive sectors in the light of increasing credit needs of the economy."
Our Chennai Bureau reports: Mr T.S. Narayanasami, Chairman and Managing Director, Indian Overseas Bank, said the move to provide a tax break for fixed deposits placed with scheduled commercial banks would give some relief to banks in raising resources.
He said the Finance Minister had done the best for banks under the available constraints.
Mr Narayanasami, said, " Banks are becoming semi-term lending institutions. Asset-liability management assumes considerable importance. When we do this, we make estimates based on past trends, which say that about 50-60 per cent of the deposits get rolled over. With dynamic liquidity situation and high deposit rates, there are lesser chances we will retain 50 per cent of the deposits. So this proposal will certainly help banks garner some more long-term resources."
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