Bank deposits may get I-T relief again

There are strong indications that Section 80L of the Income Tax Act may be reintroduced, probably in a limited way, in the forthcoming Budget.

Among other things, this section provided tax relief in form of deduction for interest on bank deposits, up to Rs 12,000 annually.

The Finance Act 2005 had proposed to end this deduction with effect from April 1, 2006. Re-introduction of this section is expected to give a boost to bank deposits which have seen a slowdown in growth in the recent years due to the declining interest rates.

Senior citizens have been particularly hit as they favoured this instrument for its safety and relative liquidity. Other saving options like debt mutual funds also attract a 10 per cent dividend distribution tax on the interest payout.

"It is very likely that section 80L would be reintroduced for bank deposits to provide deduction of interest income up to a specified amount," sources told Business Standard.

"In case the government wants to make savings deposits attractive from the tax point of view, it would be difficult to include the same in the Rs 1,00,000 limit as funds keep moving in and out from the account. Therefore, interest deduction under 80L is more appropriate," Sahil Gupta, partner, direct tax, KPMG India said.

It is easier for the tax authorities to monitor the application of a section like 80L in the case of savings and short-term deposits as interest income is to be considered for deduction.

On the other hand, a section like 80C, which exempts contributions, is more suitable for long-term instruments.

"The industry has asked for tax concession on savings bank deposits as the liquidity position is getting tight. While other investment options have tax benefits, bank deposits are losing out. Tax benefit would be helpful in deposit growth that is required to meet the credit growth in the market," S C Gupta, chairman, PNB, said.