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Tax exemptions on small savings likely to go

BS Banking Bureau

The tax exemptions on small savings instruments are likely to be withdrawn to pare the growing interest burden in the Budget.

The Reserve Bank of India has suggested a gradual elimination of tax exemptions on small savings and alignment of interest rates on small-savings instruments with those on similar instruments offered by banks and financial institutions to tackle the problem of growing interest burden in the Budget.

"An expert committee set up by the government is currently reviewing the system of administered interest rates. The tax exemptions on savings instruments have been under review," the RBI's annual report said.

As a strategy to bring down the interest rate burden, the RBI has recommended harmonisation of tax exemptions for all savings instruments, repayment of interest and principal on the special deposit schemes, issuance of callable bonds, floating rate bonds and inflation-indexed bonds.

On repayment of interest and principal on the special deposit schemes, the RBI has said that a gradual phasing out will be the preferred approach. Initiatives have recently been taken to establish an efficient and reliable benchmark rate for the issuance of floating rate bonds through the recent rationalisation of the treasury bill issuance structure.

The plan to remove the tax benefit from small savings is significant since banks have been demanding a similar benefit to bank deposits to create a level-playing field. In the recent past, the government has slashed returns on small savings to restructure the overall interest rate matrix.

Banks will continue to find it difficult to bring down the interest rates on deposits unless the administered rates are brought down. Consequently, it becomes difficult for the system to bring down the lending rates well. Once the tax exemptions are removed from small savings, bank deposit rates are likely to come down, industry watchers said.

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