Increase tax exemption limit on FD interest: Experts

Finance Minister Pranab Mukherjee should raise tax exemption limit on interest from bank- fixed deposits to encourage people to park their funds with the lenders, say experts.

The move to relax tax norms on FDs would help the banking sector tide over the current liquidity shortage following the Reserve Bank’s decision to tighten monetary policy to tame the rising inflation. "If there are some tax concessions on interest received from bank deposits, then it would go a long way in helping banks garner deposits," Ernst & Young Partner (National Leader-Global Financial Services) Ashvin Parekh said.

Presently, banks deduct 10 per cent TDS (tax deducted at source) on interest over Rs 10,000 per annum on fixed deposits.

Experts want the finance minister to at least consider raising this tax exemption limit of Rs 10,000 in view of high inflation and the need to encourage people to opt for fixed deposit schemes. According to them, such decision would make FDs more attractive for investors vis-a-vis other saving and investment schemes.

Most of the banks have recently raised FD rates to collect more funds and tide over the liquidity problem. Presently, banks are offering interest rates of 9-9.5 per cent on deposits of long-term maturity. The rates may rise further as the inflation continues to be above 8 per cent, much above the comfort level of the Reserve Bank.

Commenting on his expectations, PricewaterhouseCoopers Associate Director (Financial Services) Robin Roy said the budget would give "directions on credit enhancement for infra funding, next steps for new banking licences, reducing costs of mortgage financing among others."

E&Y's Parekh said the banking sector was now adopting newer approaches towards deposit mobilization and improving net interest margins by reducing the cost of deposits. KPMG Executive Director Naresh Makhijani said the Indian banking sector was witnessing significant shift from a structural perspective.

"The focus (of budget) would be on development with an underlying theme on financial inclusion, increasing transparency and prudent risk management, improving financing for informal sector, and infrastructure and greater regulatory oversight,"

Source:ET Budget 2011