Banks seek parity with MFs

Want fixed deposits of three years to be brought under Section 80C.

The banking industry has asked the finance ministry to bring all fixed deposits (FDs) with tenures of three years under Section 80C.

“There is a difference in tax treatment to mutual funds and fixed deposits. This gap needs to be bridged,” said Indian Banks’ Association Chairman MV Nair.
   

BETTER GAINS
Instruments	Return (%)
PPF	8.00
EPF	8.50
Senior Citizen’s  Saving Scheme	9.00
NSC	8.00
Notified FD	7.25-7.5
ELSS	NA
5-year Post Office  deposit	7.5*
* SBI deposit rate

At present, fixed deposits with tenures of five years qualify for tax benefits under 80C. Some other instruments which qualify under this Section are Public Provident Fund (PPF), National Savings Certificate (NSC), Post Office Savings Scheme, Kisan Vikas Patra (KVP), Equity-Linked Saving Schemes (ELSS) and unit-linked insurance plans (Ulips).

“The five-year condition for bank deposits makes the instrument non-competitive compared to other eligible instruments under Section 80C such as ELSS, which has a lower lock-in period of three years,” said another IBA official.

The maturity periods of NSC and KVP are six and eight years, respectively. However, withdrawals from KVP are allowed after two-and-a-half years. The bone of contention, however, is ELSS, where the lock-in period is three years.

“The request has been made with the government as collections under the five-year scheme are hit because of ELSS,” said the chairman of a public sector bank under the condition of anonymity.

Another factor driving away customers is returns. PPF is giving 8 per cent returns, so are NSC and KVP. A five-year post office saving scheme is giving 7.5 returns.

In comparison, State Bank of India is offering 6.50 per cent on three- to five-year fixed deposits. HDFC Bank is offering 6 per cent while ICICI Bank is giving 7.50 per cent on deposits of three to five years.

“Since there was excess liquidity in the system, banks were offering lower rates than other instruments under Section 80C. However, we expect rates to go up in the coming quarters,” said a banker.

Further, returns from ELSS are tax-free because there is no long-term capital gains tax on equity funds. So, the returns are also not taxed. Even dividends are tax-free in the hands of investors.

On the other hand, only provident fund schemes, besides PPF, is tax-free. Returns from all other instruments are added to the income of the individual and taxed accordingly.