Tax saving deposits must be made more attractive, say banks

K. Ram Kumar Mumbai | Updated on March 12, 2018

Reduce tenure of investment from five to three years

Banks have moved the Finance Ministry to reduce the tenure of tax saving deposits from five to three years to turn them attractive for depositors. Their plea comes in the backdrop of deposit growth trailing credit growth in the current financial year so far.

If the ministry agrees to the banks request then tax savings deposits will be at par with investments in equity linked savings scheme insofar as tenure of the investment goes.

Further, banks also want the ministry to allow them to grant loans against the tax savings deposits.

Deposit growth lags credit growth

As per the latest Reserve Bank of India data, the banking system has seen a slower year-on-year growth in deposits at 13.2 per cent (15 per cent in 2012), while credit growth was at 16.4 per cent (15.7 per cent).

The deceleration in the term deposits, which constitutes the major component of aggregate deposits in the banking system, could be largely attributed to the low and declining real interest rates on time deposits, according to the central bank’s macroeconomic and monetary policy document.

In 2012-13, lack of commensurate growth in aggregate deposit to fund credit growth has lead to an increase in credit-deposit ratio (C-D).

The C-D ratio for the banking system is currently running at 94 per cent (78 per cent last year) that is, for every Rs 100 deposit they are mobilising, they are lending Rs 94. However, central bank regulations stipulate that for every Rs 100 mobilised by banks by way of deposits, they have to invest Rs 23 in government securities and park Rs 4 with the RBI, leaving them with Rs 73 for making loans.

The divergence between the C-D ratio and the central bank norms for raising deposits and making loans implies that there is pressure (liquidity) to find resources (balance Rs 21: Rs 94-Rs 73) from other avenues.

TDS on deposits

Bankers say there will be no loss of revenue for the Government if the proposal to bring down the tenure of tax saving deposits from five to three years finds a place in the Budget.

Banks want tax deducted at source (TDS) to kick-in only if the interest earned on a deposit in a year is over Rs 50,000 against Rs 10,000 now.

Given the price rise and many retired people depending on income from deposits, bankers feel their proposal to the ministry in this regard is justified.

Under the current TDS regime, a bank deducts tax from the interest payable (if it exceeds Rs 10,000 in a year) on a deposit.

The deducted amount gets remitted to the Government.

If a depositor furnishes Permanent Account Number (PAN), then the TDS is at 10 per cent on the interest earned on fixed deposits.

In the absence of PAN, declarations for non-deduction of tax at source in Form 15G or in Form 15H cannot be acted upon and interest earned by the economically weaker sections, the aged and the infirm becomes subject to tax deduction at the higher rate of 20 per cent.

Form 15G is a self-declaration form submitted by individuals below 60 years to banks stating that their income is below the taxable limit. Form 15H is submitted by those above 60.

Currently, depositors circumvent TDS by ensuring that none of their deposits earn interest of more than Rs 10,000. They do this by splitting deposits and parking them with different banks.

By upping the cut-off limit for deduction of TDS on interest from Rs 10,000 to Rs 50,000, banks can easily mobilise deposits, make more loans and spur the economy, said a banker.


Published on February 25, 2013

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