At present, individuals can claim tax exemption under Section 80C of the Income Tax Act for parking money in bank deposits only for thos that come with a five-year tenure or more.
A five year lock-in condition means that the investor cannot withdraw the deposits before the end of five years. This usually acts a disincentive despite the tax break, especially when there are more liquid options such as systematic investment plans (SIP) of mutual funds that offer similar tax benefits, but with lock-in of three years.
The finance ministry is considering to reduce maturity period for fixed deposits from five to three years for availing income tax benefits.A government official said banks would now be able to compete with mutual funds for funds mobilisation. Currently, mutual fund schemes attract tax benefits on three-year schemes while FDs have to be locked in for five years to fetch similar benefits.
According to the official, the government may make the announcement in the 2012-13 Budget in March.
The government is considering a plan to make it more attractive for individuals to park money in bank deposits by boosting tax breaks.In the budget for 2012-13, finance minister Pranab Mukhkerjee is likely to reduce the lock-in period for fixed deposits in banks that become eligible for income tax benefits to three years.
The move would also help boost the banks' deposit base.Bankers said it is imperative to offer similar norms as they have clamour against a host of instruments to woo customers to park money with them.
Under present norms, individuals can claim deductions under Section 80C upto ceiling of R1 lakh and can choose among a host of savings instruments such as mutual funds, public provident fund and insurance premium to spread out their tax planning investments.
In a recent pre-budget meeting with finance minister Pranab Mukherjee, top executives of banks told the government in clear terms that immediate steps were required to encourage people to park with banks.
At present, total bank deposits account for only a third of India's total savings, which totals about 33% of India's GDP.