The finance ministry has rejected a proposal from banks to enhance the threshold for mandatory tax deduction at source (TDS) on interest earned by depositors. It has also shot down a suggestion to make term deposits of three years tax-exempt.
Bankers had demanded that they should be required to cut tax only when interest income of a customer exceeded R50,000 in a year, up from R10,000 at present. A senior finance ministry official said the government is unlikely to raise this limit in the Budget.
“Our internal calculations show that only a tiny percentage of tax payers takes into account the interest income. Raising the TDS threshold would mean a large number of tax payers going outside the tax net," he said.
Banks sought an increase in this limit, saying this will make life easy for them and their customers. The rejection of the proposal to make three-year term deposits as tax-exempt is meant to encourage long-term savings.
Currently, fixed deposits of five years are exempted from tax. Officials said any move to give tax benefit to small tenure schemes would create an arbitrage between bank fixed deposits and other instruments, such as the Public Provident Fund and National Small Savings Schemes, wherein the lock-in is at least five years.
The government does not publish separately the details of tax raised from bank interests, but it would be cautious of any move that could result in lower revenues, especially as the Centre's fiscal deficit—the excess of expenditure over revenue—is already running out of control. The government's fiscal deficit for 2012-13 is expected to be over 5% against the 5.8% estimated for 2011-12. In the Budget for 2011-12, finance minister Pranab Mukherjee had set a target of 4.6% of the GDP for the fiscal deficit.
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