The united effort of banks made finance ministry to acknowledge the proposal to trim the lock-in period for tax free fixed deposits (FD’s) from 5 years to 3 years, although this goes across the mood of Direct Tax Code (DTC).
This proposal if accepted in the budget 2012, will turn bank fixed deposits an attractive saving option which is not prone to market risk and will offer the equivalent benefit of ELSS of mutual funds and tax free bonds to its investors.
In the pre budget meeting, banks had emphasized on the need to boost the bank deposits to satisfy the rising credit demand of the economy. And to encourage investors to invest their surplus funds under bank deposits.
While convincing FM bank officials said – Currently banks are offering attractive interest rates which helped banks raise more fixed deposit but this may not go long as once interest rates begin to fall, depositors will start switching to some other investment options. But shorter lock in period on tax free FD’s will discourage investors to switch to other options.
As per income tax act 1961, investment made under specified schemes is eligible for tax rebate upto Rs 1 lakh under section 80C. Schemes which offers tax rebate includes post office schemes, Bank deposits, Life Insurance and Equity-linked savings schemes (ELSS). The lock-in period of all these schemes varies.
But this proposal may go against DTC, as DTC intends to restrict tax incentives to tax saving investments to long term savings. As DTC is offering tax benefits to public provident fund (PPF), Employee Provident Fund (EPF) and New Pension Scheme (NPS).
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