Banks want 80C relief for 3-year term deposits

To encourage depositors to park their money for longer period, banks have moved
the Finance Ministry to allow tax breaks on investments in term deposits of three
years' duration. Specifically, they want the deduction available on investments
under Section 80C of the Income-Tax Act, 1961, extended to three-year term
deposits. As per the Bank Term Deposit Scheme, 2006, currently, this deduction is
available only on investments (minimum of Rs 100 and up to a maximum of Rs 1 lakh
a year) in term deposits of five years maturity in a scheduled bank. Banks want
the tenure of deposits under the scheme reduced to three years from five years as
depositors are more inclined to deploy their surplus in shorter tenure deposits to
take advantage of possible northward movement in interest rates. As of March-end
2009, deposits in maturity buckets up to one year, and over one year and up to
three years constituted 53 per cent and 31 per cent, respectively, of the banking
system's total liabilities. In sharp contrast, deposits in the over three years
and up to five years, and over five years maturity buckets accounted for just 7.5
per cent and 8.5 per cent, respectively, of the total liabilities. A banker privy
to the Indian Banks' Association's representation to the Finance Ministry said the
five-year Bank Term Deposit Scheme is uncompetitive vis-à-vis other eligible
instruments under Section 80C such as equity-linked savings schemes (ELSS) of
mutual funds. Hence, there was a need for reducing the tenure of the Scheme to
ensure a level-playing field. In the context of the average income levels in the
country improving over the last few years, banks have also suggested doubling of
the maximum deduction under Section 80C to Rs 2 lakh and inclusion of interest
earned on bank deposits up to Rs 25,000 in the list of eligible investments under
this section. This move, bankers say, will not only promote savings but also help
channelise majority of the savings towards infrastructure development — power,
roads, ports, etc. According to Mr P. Sitaram, Chief Financial Officer, IDBI Bank,
paring the tenure of the Scheme to three years would ensure steady flow of stable,
longer-tenure funds into banks. This, in turn, could help reduce mismatches in the
maturity pattern of assets and liabilities. As per Section 80C, premiums towards
life insurance and unit-linked insurance plans, subscription to public provident
fund, employee's contribution to provident fund, investment in National Savings
Certificate and ELSS, and repayment of principal amount in a home loan, qualify
for deduction (up to a maximum limit of Rs 1 lakh a year) from a taxpayer's gross
total income.

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