“As compared to other financial products (such as ELSS) available in the market, the tax-saver fixed deposit (FD) has become less attractive and if the lock-in period is reduced this would make the product more attractive and provide more funds to the banks,” the IBA has said in a proposal submitted to the finance ministry.
While banks have slashed deposit rates to pass on the benefits of a lower rate regime to borrowers, small savings products such as public provident fund (PPF) have not seen a reduction in rates for several quarters, making them more attractive from a returns point of view. As it is, the stock market boom of the last few years has prompted several investors to shun bank deposits and move to mutual funds or direct investment in shares. As a result, apart from some senior citizens in the higher income brackets, most other depositors are shunning five-year FDs. In fact, bank FDs over five years were made eligible for tax breaks under section 80C much later as part of the annual benefit of Rs 1.5 lakh available for specified investments. Even with the benefit, it is less attractive than, say, PPF as the interest earned on these FDs is taxable.
IBA has also sought special rebate or additional depreciation for spending on financial inclusion and digital banking. “By making expenditure on IT, banks give benefits to the masses, that is, ease of doing business, digital banking, etc. Therefore, some special incentives in the form of special tax rebate/ deduction or additional depreciation (say, 125%) over and above actual capital expenditure made on such activities may be provided,” it has proposed.
Besides, IBA has taken up cudgels on behalf of foreign banks and pitched for a tax parity between their branches in India and domestic banks. Indian banks have opted for a lower rate option of 22% (plus surcharge and cess), which is not available to branches of foreign banks in India, which are taxed at 40% (plus surcharge and cess). Most foreign banks have opted not to incorporate local subsidiaries and have chosen to operate via the branch route, despite repeated prodding by the government and the RBI.