Tax savings schemes – losing importance to other alternatives

Tax-saving deposit schemes that banks expected would help channel public savings to the banking sector are facing a drought in demand, with the market getting crowded with financial products offering better tax benefits coupled with higher returns.

Banks have also become reluctant to push tax-saving deposits, giving up on a scheme they had fought hard for and got approval some eight summers ago. Since 2006, up to 1 lakh deposited for five years in banks qualifies for deduction under section 80C of the Income Tax Act. But retail tax-free bonds from state-run companies and instruments such as Public Provident Fund (PPF) and mutual funds are luring people away from tax-saving deposit schemes, say industry executives.

“The demand for this scheme remains low. We do not promote this as well,” said Dena Bank executive director Trishna Guha. Senior executives from Allahabad Bank to United Bank of India confirmed this.

The trend is similar across regions as savers have grown a habit of using banks for short-term investments while making long-term investments in instruments outside banks that offer higher yields. According to India Ratings & Research, deposits maturing in less than one year formed more than 45% of the total bank deposits in 2013. A significant portion of deposits had maturities of less than six months.

Investments in mutual funds need to be locked up for three years to save on tax, while the minimum lock-in period for tax-saving bank deposits is longer at five years. For those who want to keep their money invested for longer periods, some public sector companies offer tax-free bonds with tenures as long as 20 years. According to investment experts, the annual yield on tax-free bonds from firms like National Housing Bank is better compared with tax-saving deposits. PPF investments, which are typically for long periods, also offer tax-free returns.

United Bank of India, which is more active in the eastern sector, cites lack of tax-paying business activity in east for the lull it is witnessing.
“West Bengal is an economy driven by agriculture and small-scale units, where income is tax free. Therefore, there is not much demand for tax savings instruments in the rural belts. Even in Kolkata, mobilization under tax-savings scheme is less,” executive director Deepak Narang, said.
In the South, Kerala-based South Indian Bank has shown a similar trend. Just about 0.4% of the bank’s depositors go for the tax-saving scheme, a senior executive said. The country’s top bankers have been demanding a reduction in the lock-in period to three years for tax-saving deposits to make them more attractive.

Courtesy for this article- ET Bureau
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