How Budget May Change Your Saving Plan
Scores of investors may look at re-shuffling their investment portfolio in the coming fiscal if the government brings bank deposits under the ambit of savings instruments eligible for tax breaks .
If that happens this time around, with the union budget around the corner, household savings could be channelled back into bank deposits after a gap of several years.
The government is weighing the pros and cons of giving tax breaks to deposit holders and this comes at a time when investors have shown a marked preference for other savings instruments that offer higher returns and the comfort of safety.
The proposed fiscal incentive is intended to help banks shore up their deposit base, which is imperative for them to achieve the growth targets in advances. In fact, it?s the banking industry which has nudged the government to consider tax breaks on deposits, notwithstanding the fact that it would have revenue implications.
One of the options being looked at is to allow term deposit holders to claim a tax deduction under Section 80C of the Income Tax Act.
Right now, an individual can claim a deduction of up to Rs 1 lakh on investments in designated savings schemes and instruments ? such as contribution to PPF, provident fund or schemes for deferred annuities, NSC, infrastructure bonds etc ? under Section 80C.
One more instrument, term deposits, could be added to this list if the government takes a decision to extend a tax incentive to this savings instrument also.
In the past, investors enjoyed the benefit of a tax deduction on interest income earned on deposits parked with banks. They were allowed to claim a deduction up to Rs 12,000 on interest income on bank deposits, deposits in the post office monthly savings scheme, dividends and specified securities under Section 80L.
However, this tax break was scrapped in the ?05-06 budget.
There?s a demand from some quarters to restore the tax benefit on interest earned from bank deposits. However, the government may not be keen to reintroduce Section 80L as it would mean a policy reversal. It could, however, consider allowing a tax deduction for term deposit holders under Section 80C. A minimum lock-in may, however, be stipulated.