Saving grace: Tax sops for FDs

Fixed deposits (FDs) of scheduled commercial banks, with a tenor exceeding five years, will now be eligible for a tax break under Section 80C of the Income Tax Act.

In addition to this, the finance minster has also included pension funds, currently under section 80CCC, within the ambit of Section 80C. With this, investors can now park a total of Rs 1 lakh in such schemes as against the existing levels of Rs 10,000.

With FDs eligible for a tax break under Section 80C, a person saving through FDs can claim a deduction from his income for the amount of FD, subject to a ceiling of Rs 1 lakh. For instance, if an amount of Rs 10,000 is deposited, the depositor could save Rs 3,360 (in the first year only), if he is paying his taxes at the rate of 33.6 per cent.

The finance minister had withdrawn Section 80L in the Union Budget for 2005-2006, which provided tax relief on interest earned through FDs up to a certain amount.

While the minister has not restored this benefit, he has now made it more attractive for small savers to park their savings in bank FDs. The benefit to savers investing their funds in FDs will be huge even though the product is highly illiquid, because the amount will be locked in for five years. However, given that FDs of banks are considered safe investments, the returns could be very attractive.

Together with the interest of around 7.5 per cent per annum, the upfront tax break should give a better return than almost all fixed income products. In fact, the returns could even exceed those on an RBI bond, which gives a 6.5 per cent tax-free return, provided banks offer more than 6.5 per cent.

GV Nageswara Rao, CEO - commercial banking, IDBI Bank, says this measure can induce investors who now save through post office instruments, to save through FDs, provided the rates are comparable. Deposit rates for five years are at around 7.5 per cent currently while post office rates are around eight per cent.

According to Venkatesh Mysore, managing director, MetLife India Insurance, the raising of the ceiling on investments in pension funds will give investors more flexibility.

Sam Ghosh, chief executive director, Bajaj Allianz, points out, "Previously investors needed more saving tools to reach the Rs 1 lakh-threshold." However, now that the ceiling for pension schemes has been raised to Rs 1 lakh, investors will have the option of putting in more funds in pension schemes.

New Section 80C additions

Contribution up to Rs 10,000 made in respect of contribution to certain pension fund which was eligible under section 80CCC in 12005-06 will now become part of the overall Rs 1 lakh limit under section 80C

Bank fixed deposits with a tenure of five years and above will be included under the overall Rs 1 lakh limit