Interest up to Rs 10,000 on savings deposits out of tax net

The plain vanilla savings bank (SB) deposit could turn a tad attractive. The Finance Minister, Mr Pranab Mukherjee, on Friday said individual taxpayers will be allowed a deduction of up to Rs 10,000 on interest from these deposits.

In his Budget speech, the Minister justified the move stating that it would help a large number of small taxpayers with salary incomes up to Rs 5 lakh and interest from savings bank accounts up to Rs 10,000 as they would not be required to file income-tax returns.

No rush

If one weighs the benefit of 4 per cent tax-free interest on these deposits with post-tax fixed deposit return of 7.2 per cent (9 per cent pre-tax interest) for an income-tax payer in the 20-per-cent tax slab, then the scales tilt in favour of the latter.

“The move on SB deposits in the Budget is somewhat positive. However, there will be no rush from depositors to maintain higher balances in SB deposits given that FD fetches higher post-tax return,” said Mr Rajkumar Bansal, Executive Director, IDBI Bank.

As on December-end last year, commercial banks had savings bank deposits aggregating Rs 15,45,140 crore (Rs 13,81,000 crore as on December-end 2010).

“Depending on the rate that your bank pays, balances of around Rs 1.66 lakhs (at 6 per cent interest rate) to Rs 2.5 lakhs (at 4 per cent) will enable you take advantage of the tax exemption on interest earnings of Rs 10,000 from SB deposits,” said Mr K.V.S. Manian, President, Consumer Banking, Kotak Mahindra Bank.

The Budget proposal on tax deduction for interest from savings bank deposits comes about four months after the Reserve Bank of India deregulated the interest rate on the deposits. In October last year, the central bank said banks were free to determine their deposit interest rate.

The central bank then said each bank has to offer a uniform interest rate on these deposits up to Rs 1 lakh, irrespective of the amount in the account within this limit. On deposits over Rs 1 lakh, a bank can provide differential rates of interest.

However, there cannot be any discrimination from customer to customer on interest rates for similar amount of deposit.

From April 1, 2010, payment of interest on savings bank deposits by scheduled commercial banks is being calculated on a daily basis. Prior to this date, banks were calculating interest on the minimum balance in the deposit account during the period from the 10th to the last day of each calendar month.

kram@thehindu.co.in