Ministry to cut lock-in period for deposits

RUN-UP TO THE BUDGET

The finance ministry may reduce the lock-in period for fixed deposits to three years from five years to get deduction under Income Tax Act, 1961. It is also likely to permit loans against such deposits.

The ministry is considering these demands by the Indian Banks' Association (IBA) so as to make deposits attractive for retail investors, sources said.

In the Finance Act 2006, bank term deposits up to Rs 1 lakh with a tenure of 5 years were allowed tax deduction under Section 80C of the Income Tax Act."Besides the lengthy lock-in period, neither loans nor premature withdrawal is permitted in such deposits. This makes the scheme unattractive compared with other tax-saving schemes," a public sector banker said.

Basic liquidity is the key feature of bank term deposits and these conditions in the scheme have deprived depositors this crucial fall back option.

The lock-in for term deposits will be reduced to three years to make it at par with tax-saving schemes such as equity-linked saving scheme (ELSS), IBA has said.

A bank official said, like in National Saving Certificate (NSC), loans too should be allowed against term deposits. Similarly, premature encashment should be allowed under certain circumstances by imposing tax deducted at source (TDS) at 30 per cent on interest income, the official added.

Currently, the entire interest income from such deposits is taxable.

"Interest income from such deposits should be exempted from income tax to promote long term savings to finance the huge investments requirement in infrastructure sector," said a bank chief.