S Murlidharan

Let people access their (tax) savings

S Murlidharan | Updated on July 28, 2020

Premature withdrawal of 5-year bank FDs should be allowed, with certain conditions, to help tide over the current crisis

One of the favourite avenues of section 80C investments, which begets one a deduction in taxable income up to ₹1.5 lakh is the five-year tax-saving fixed deposit (FD) with a bank. Salaried persons often exhaust the measly limit of ₹1.5 lakh by contributing to the provident fund itself. So, FDs cater mainly to the retired and the self-employed. In any case, FDs are easy and hassle-free investments that often blend seamlessly with one’s regular banking operations.

While no one can fault the five-year-long lock-in period during normal times, during Covid, it is daunting. At a time when incomes are dwindling, the lock-in period should not so rigid.

Section 80 C also confers the same deduction benefit for life insurance premiums. It is also valid for buying a house or paying EMIs, by allowing the principal portion embedded in the EMIs paid during the year to be deducted. But, then, the Section allows one to sell one’s house or surrender one’s policy subject to a stiff condition — if you do so before completion of five years from the date of commencement, the amount hitherto allowed as deduction will be included in the taxable income of the year in which the premature act was done. However, when it comes to FD, there is no leeway which allows one to access the amount, even with certain conditions.

Hence, the government should immediately allow withdrawal of such tax-saving FDs by imposing a graded penalty. To wit, if one withdraws such FD within one year, 100 per cent of the deduction allowed earlier should be added to one’s current income, and for two years, 80 per cent and so on. In other words, the penalty should not be one-size-fits-all but graded — greater the prematurity in withdrawal, greater the penalty.

Why should one in financial extremis be made to suffer, when one has one’s own money to dip into? The government has allowed employees to dip into their provident fund balances to tide over their financial difficulties engendered by Covid. It has also allowed moratorium on repayment of loans as well as EMIs despite claims that this would be misused. But it remains stone-hearted when it comes to premature withdrawal of FDs.

The income tax law maintains a studied silence on what happens when one wants to withdraw such deposits prematurely, giving rise to the inference that such an option is simply not considered. Bank managers only dutifully express their regret when one goes to his bank branch in the hope of cashing in their own deposits prematurely.

The government perhaps believes that the penalty would be a farce from its own point of view, given that 2020-21 is likely to be the worst insofar as income tax collections are concerned. Suppose one withdraws ₹1 lakh prematurely, which can result in ₹80,000 being added to the current year’s income. This is hardly going to make a dent, if even after such inclusion this person’s taxable income stays below ₹5 lakh.

What the government should remember is that people need solace during these difficult times, and revenue considerations must take a back-seat, especially when one is withdrawing one’s own savings, albeit prematurely.

The writer is a Chennai-based chartered accountant

Published on July 28, 2020

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