In accordance with the amendment to Section 80C(2) of the Income-Tax Act, 1961, bank term deposit qualifies for Section 80C deduction effective assessment year 2007-08. It was announced that the details of the scheme would be framed and, accordingly, the Central Board of Direct Taxes (CBDT) has issued Notification No. S.O.1220 (E) dated July 28, 2006 (refer 284 ITR 73).
The provision and scheme have to be viewed in the context of the intense debate going on in the past few years on the cost-benefit of various concessions and deductions available in the Act. Any deduction which stimulates savings creates the necessary excitement and is a matter of interest to a large segment of the tax-paying population.
The firming up of interest rates should cheer savers but not borrowers. Banks have already gone to town with 8-9 per cent rates of interest for one-year deposits. Mutual funds are now more upbeat on the revival of debt funds. This Bank Term Deposit Scheme 2006, announced by the Government, is likely to benefit senior citizens at large.
First, the overall quantum of investment in the term deposit available for deduction cannot exceed Rs 1 lakh. This is the overall deduction available for all items under Section 80C. Term deposits can be placed as a single or joint account. In the case of a joint account, the deduction under Section 80C will be available only to the first holder of the deposit.
Along with the State Bank of India and their subsidiaries, scheduled banks are the eligible banks. A host of cooperative banks offering higher rates of interest do not qualify for this benefit. The term deposit so placed cannot be pledged with any other agencies or offered as a security for any purpose. This scheme also provides for nomination replacement of lost deposit receipts, etc. Like most tax-saving instruments there is a lock-in period, which is five years, and Clause 11 of the scheme prevents encashment before the expiry of five years.
The scheme provides nomination facility which can be effected at the time of the deposit or at any time before maturity through an application in a prescribed form. Interest arising from the term deposit is taxable in the hands of the depositor. The basis of offering it to tax would be accrual or receipt basis, depending on the method of accounting adopted by the assessee. More often than not, individuals will be the ones subscribing to the scheme and accounting the interest on receipt basis.
While a majority of the salaried class would have made use of Section 80C deduction only for provident fund in view of the Rs 1-lakh cap, term deposits as a route for Section 80C will certainly help retired senior citizens. Taking into account the 9.5 per cent and the tax breaks, the effective yield is higher and also safer compared to several other modes of investment.
To escape tax deduction at source, which applies if the interest during the financial year exceeds Rs 5,000, deposits are placed in lots of Rs 50,000 in various designated bank branches. It is but natural that bank term deposits will surge on account of this tax sop. The only irritant in the process is the elaborate sets of documents sought for in view of the rigid Know Your Customer (KYC) norms.
The scheme is a clear winner for those with an appetite for Section 80C. The icing on the cake is that at the time of withdrawal after the five-year lock-in period, it is not taxable.
(The author is a Chennai-based chartered accountant.)