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`Tax exemption on FDs an investment opportunity'
August, 02nd 2006


Investors looking for risk-free investment schemes with the added benefit of tax exemption, now have one more avenue to invest their funds. The Finance Ministry, in a notification issued on Monday, has said that bank fixed deposits (FDs) of five years and above are eligible for tax exemptions under section 80 C.

This means fixed deposits with banks up to Rs 1 lakh with tenure of five years and above will get the same treatment as Public Provident Fund and National Savings Certificates. Just as is the case with other savings schemes, except PPF, the interest earned on the FD would be taxed. But the advantage is the shorter minimum lock-in period of five years, unlike PPF where the lock-in period is 15 years, said senior bank officials.

According to Mr S.S. Mundra, Deputy General Manager, Bank of Baroda, this move is definitely an improvement on what was prevailing for bank FDs. "For depositors there is an added incentive of shorter lock-in period. For banks, the interest payout is not much as the rates were moving upwards in any case," he said.

Mr V. Vaidyanathan, Country Head-Retail Banking, ICICI Bank, said, "There is a renewed interest towards FDs because of the volatility in the stock market. Mutual funds and stock markets are subject to market risk, while FDs are not. This will open new investment opportunity to customers."

The tax exemption comes with a clause that payment before maturity is not allowed. But banks are waiting for further clarity on allowing depositors to take a loan against the deposit before the term ends, said Mr D. Krishnamurthy, General Manager, Bank of India.

"This was expected as it was announced in the Budget and as a product it is more useful to the public. Now bank FDs are on par with RBI bonds and postal savings, with the added convenience of opening a FD with a bank, as most investors have bank accounts," he said.

A senior official from State Bank of India also agreed that while more clarity is required on the notification, the move would help banks leverage their deposit mobilisation programmes. "We can gain more deposits thanks to this tax exemption. Bank FDs are more liquid than NSC and can be enchased easily," the official said.

According to Mr B.L. Javeri, General, Manager, Planning, Union Bank of India, a bank FD would give investors the advantages of higher return, liquidity at marginal cost along with tax exemption. "At the time of maturity, withdrawing an FD is hassle-free unlike a post office savings," he said.

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