Raise tax exemption limit on fixed deposit interest, say experts

Finance Minister Pranab Mukherjee should raise tax exemption limit on interest from bank fixed-deposits (FDs) to encourage people to park their funds with lenders, say experts.

The move to relax tax norms on FDs would help the banking sector tide over the current liquidity crunch following the Reserve Bank of India’s (RBI’s) decision to tighten monetary policy to tame the rising inflation.

“If there are some tax concessions on interest received from bank deposits, it would go a long way in helping banks garner deposits,” Ashvin Parekh, Partner (National Leader Global Financial Services), Ernst & Young, said.

Presently, banks deduct 10 per cent TDS (tax deduction at source) on interest over Rs 10,000 a year on FDs. Experts want the finance minister to at least consider raising this limit of Rs 10,000 in view of the high inflation and the need to encourage people to opt for fixed-deposit schemes.

According to them, such a decision would make FDs more attractive for investors vis-a-vis other saving and investment schemes.

Most banks have recently raised FD rates to collect more funds and tide over the liquidity shortage. Presently, banks are offering rates of 9-9.5 per cent on deposits of long-term maturity. The rates may further rise as inflation continues to be above eight per cent, much above RBI’s comfort level.

PricewaterhouseCoopers Associate Director (Financial Services) Robin Roy said the budget would give “directions on credit enhancement for infra funding, next steps for new banking licences, reducing costs of mortgage financing among others.”