Investing in bank deposits for enjoying income tax exemption.

Let me join the  Unique Times team in wishing all of you a very  happy and prosperous    New year  2013.   New year celebrations reminds us  that  one more year is over . It is a time when many people take stock of their positions and  achievements  and more importantly plan for the coming year.   New year also  reminds me  that the calendar year has come to a close and soon  the financial year too   will be coming to a close. Every year during January   I am  under pressure from my human resource  department to provide  details of my income   tax calculations  with documentary evidences.  It is the time when I actually start  calculating my taxes and  do the tax planning exercise and investments.

Computation of  income tax of an individual starts with the estimation of total earnings. While estimating the total income taxability of the various  allowances paid by the employer. Deductions provided  by the Income tax Act  are then deducted , so that the  net taxable income is arrived at.  Tax is then calculated on this amount at the  applicable rates and the tax payable is arrived at.  Sec 80C of the Income Tax Act assumes  great  significance while calculating deductions from  total income for arriving at the  net taxable income  on two counts. Primarily   due to   the amount of deduction that is available and secondly due to  the multiplicity of choices provided  for  claiming deduction.  As per section 80 C of the income tax Act a deduction upto Rs one lakh  shall be allowed to an individual while calculating the total income , provided  such amount has been deposited during the financial year  in any one or more of the options  provided by the act.  I doubt whether there would be any other section in the income tax act , which provides so much multiplicity of choices for claiming  a benefit. Sec 80 C provides 24 options for claiming the benefit of Rs 1 lakh ranging from   payment of  insurance premium  to effect or to keep in force an insurance on the life of  an individual, the spouse or child   to   placing  five year time deposit in an account under the Post Office Time Deposit Rules, 1981.

As we are not  usually happy with  paying taxes , we generally explore  all avenues for reducing the same  and invest to the maximum extend possible  in tax saving instruments .  But while doing so we  fail to apply the three cardinal principals of investing – safety , liquidity and return.  Investing in tax saving instruments just for the purpose of  reducing tax liability will would not be prudence .  As tax saving instruments are  generally aimed at raising long term resources  for  infrastructure development, there will be a lock in period associated with such instruments and thus liquidity ( ability to convert the asset into cash )  could be affected in all cases.   But safety ( ensuring that you get back the money )  and returns have to be definitely looked into. What is the point in  investing  Rs 20,000 now  in a tax saving instrument ,  saving  tax  of Rs 6,000 ( at 30% )  and ultimately ending up getting  Rs 15,000 after five years. Viewed against this background,   of the various tax saving investment  options available , the one which has been most appealing to me is the option provided under sub section   (xxi) , wherein a  term deposit  placed with a scheduled bank    for a fixed period of not less than five years qualifies for deduction. Sub section   (xxi) was inserted by the Finance Act, 2006, w.e.f. 1-4-2007 and accordingly Scheduled banks have devised specialized schemes in accordance with the government notification. If you are looking at tax savings investment which provides you with   good guaranteed returns, with no charges like entry/ exit loads / commissions etc it is high time you approach your friendly neighborhood banker and enquire about their tax saving deposit schemes.

Tax saving deposit schemes offered by banks can be opened by individuals either singly or jointly  and hindu undivided family.   The single deposits are accepted from an individual for himself or in the capacity of the karta of the hindu undivided family. The joint deposits will be accepted from two adults or from an adult and a minor jointly.  However in the case of joint deposit, the deduction from income under section 80C of the Act will be available only to the first holder of the deposit.  Apart from other KYC documents most of the banks insist on a PAN card for opening the account. Deposits can be made for  an  amount of   Rupees one hundred onwards  and in multiples thereof  up to a  maximum of  Rupees one lakh in a financial year.  The minimum period of the deposit is 5 years and the maximum  can go up to  10 years. The deposits cannot be closed prematurely nor pledged for availing loan  during the initial period of five years   But deposits placed for a period of more than 5 years can be closed prematurely after the initial lock in period of 5 years.     Normally banks are offering   the interest rates of  domestic term deposits for  tax saving deposits also.   Senior citizens are eligible for additional interest fixed by the bank from time to time.  Thus considering the tax benefit the effective return on the tax savings deposit could be even higher.  Assuming  interest rate of 8.75% for  tax saving deposit  of 5 years the effective annualized yield in the case of quarterly compounding deposit can go up to 24% , if  that the depositor falls under the 30% tax bucket.   If the depositor requires periodic cash flows interest can be collected on a monthly/ quarterly/ half yearly / yearly basis. The customer can also choose for a lump sum  payment at the time of maturity , in which case the interest would be compounded on a quarterly basis.    Interest on tax saving deposits  is  liable to tax under the Act. If the interest received by the depositor exceeds Rs 10,000 per branch of a bank during a  financial year  tax deduction at source will be applicable.  Nomination facility is available and can be made or modified at any time during the tenor of the deposit.

Almost all scheduled banks have come up with tax savings deposits schemes in conformity with the notifications issued by the government and the same is being offered through all the branches. Geographical proximity for investing, simplified account opening procedures, non existence of any charges, safety attached to banks deposit  and attractive returns  definitely makes tax savings deposit schemes  offered by scheduled banks  a very attractive option  for tax saving.

Jiz P. Kottukappally. The author is working as Asst General Manager, Catholic Syrian Bank and the views expressed are the personal opinion of the author. Author can be reached at jizpauls@gmail.com