In
the Wonderland of Investments
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By
A N Shanbhag & Sandeep Shanbhag
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Bank Term Deposit Scheme, 2006 & Sec. 80C
On February 28th, the Finance Minister had announced in his budget
speech that bank deposits would be eligible for Sec. 80C deduction.
It was only on 28th of July that finally the notification was issued
and now bank deposits made under the special scheme called Bank
Term Deposit Scheme (BTDS) will get the tax deduction. This article
examines the salient features of this scheme and throws up some
questions for which clarifications would be required.
Salient features
- Sec. 80C
is available only to individuals and HUFs. It is also available
to NRIs.
We hope that an NRI can contribute through his NRE account on
a repatriable basis. However, this point needs to be clarified.
- The amount
of deposit shall be a minimum of Rs. 100 or multiples thereof
not exceeding Rs. 1 lakh in a year.
The 6-year National Savings Certificate (NSC) of post offices
is the closest contender of BTDS. The investment in NSC has no
upper ceiling on investment though the aggregate ceiling of Rs.
1 lakh is applicable only for the purpose of deduction u/s 80C.
- The rate
of interest shall be in accordance with the rate fixed by the
scheduled bank from time to time. (Some schemes already announced
are offering 8% p.a for non-senior investors and higher for senior
citizens) The interest may be paid either in lump sum at the time
of maturity or it may be paid every quarter or every month in
accordance with the regulatory guidelines for payment of interest
on the term deposit.
- The maturity
period shall be 5 years commencing from the date of the receipt.
Premature encashment is not possible.
Is the date of receipt date of presentation of the cheque as in
the case of PPF or the date of clearance as in the case of NSC?
Again a clarification is necessary.
- The interest
is fully taxable on the basis of annual accrual or receipt, depending
upon the method of accounting followed by the assessee. However,
TDS will be applicable if the interest accrued or paid during
the financial year is not less than Rs. 5,000 in the case of Residents.
The facility of providing Form-15G (15H in the case of senior
citizens) is available. In the case of NRIs, neither the threshold
of Rs. 5,000 nor the facility of submitting the Forms is available.
- The term
deposit shall not be pledged to secure loan or as security to
any other asset.
- BTDS shall
be :
a) Single holder type issued to an individual for himself
or in the capacity of the Karta of the Hindu undivided family.
b) The joint holder type issued jointly to two adults or jointly
to an adult and a minor, and payable to either of the holders
or to the survivor. The deduction u/s 80C shall be available only
to the first holder of the deposit.
- Permanent
Account Number (PAN) of all the holders is necessary. It appears
that slowly and steadily we are moving towards a regime of requirement
of PAN (and TDS) for all investments and also for some specified
expenses. This requirement of PAN will certainly dissuade non-taxpayers
from entering the scheme, even if the returns are attractive to
them.
- Nomination
facility is available, even to joint holders but not for minors.
If there are more nominees than one, all the nominees shall give
a joint discharge of the receipt at the time of receiving the
payment. If there is no nomination in force at the time of the
death of the depositor, the bank from where the term deposit was
issued, shall pay the sum due to the deceased, to his legal heirs.
This may give rise to various problems. Is there a provision for
percentage of allocation to the joint nominees? If not, will the
cheque be issued in the names of all the nominees jointly? Similar
problems are faced in the case of nominees of the PPF.
- BTDS may
be transferred from one branch of the scheduled bank from which
it has been issued to any other branch of the same bank, on the
assessee making an application, at either of the two branches.
Interbank transfers are not allowed.
- If the
receipt is lost, stolen, destroyed, mutilated or defaced, the
person entitled thereto may apply for the issue of a duplicate
receipt by furnishing the requisite details and an indemnity bond
in the prescribed form with one or more approved sureties or with
a bank guarantee. However, any such indemnity bond, surety or
guarantee, is not necessary if the receipt mutilated or defaced
is surrendered and the receipt is capable of being identified
as the one originally issued.
Comments
:
- In the
case of NSC, which is basically a cumulative scheme, the amount
of interest reinvested is again entitled to deduction u/s 80C.
Therefore, the interest accrued during the first 5 years out of
its term of 6 years is eligible for the deduction.
What about a cumulative BTDS? Will the interest accrued during
the first 4 years out of its term of 5 years be eligible for the
deduction. Yes, BTDS allows the investor the option of paying
tax on accrual or receipt basis. In the case of NSC, tax has to
be paid on accrual basis. However, irrespective of the mode of
paying tax, the interest amount remains in the scheme and satisfies
the requirement of Sec. 80C.
A clarification is necessary.
- The rate
of interest on BTDS is the most crucial aspect which will decide
its fate. It has to compete with NSC, leave alone PPF where 8%
tax-free interest works out at 8.91%, 10.05%, 11.53% and 12.06%
at the tax slabs of 10.2%, 20.4%, 30.6% and 33.66% respectively.
A five year lock-in with no room to escape is not a good idea.
The interest is fully taxable. Also once the EET system of taxation
comes into force, the maturity amount will be fully taxable. There
was a need to give a tax break to the interest and not to the
deposit.
All said and done, BTDS appears to be a scheme introduced only
for quenching the thirst of the banks and not investors.
The authors may be contacted at wonderlandconsultants@yahoo.com
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