Interest income earned from saving bank deposits may be exempted from the purview of income tax.

The finance ministry is considering the demand raised by the Indian Banks' Association. If accepted, an announcement in this regard may be made in the coming Budget, banking industry sources said.

The move would provide a big boost to banks, as saving bank deposits are a major source of low-cost funds. For customers, savings bank deposits are also an easy way of ensuring maximum liquidity. Around 25 per cent of the aggregate Rs 24 lakh crore deposits of scheduled commercial banks are from saving bank deposits.

Earlier, interest income from bank deposits (both fixed and saving), up to Rs 12,000 annually, was deductible from gross income for taxation under Section 80L. This benefit was withdrawn in 2005.

The interest on savings bank deposits is 3.5 per cent at present and is subject to income tax. However, considering the current inflation level of above 6 per cent, the real return is negative.

In order to make savings bank deposits more attractive, interest income from these deposits needs to be deducted from the total income while calculating income tax, a public sector bank official said.

With interest rates hardening further after the Reserve Bank of India raised short term interest rates recently, the government may provide this incentive to bank depositors.

According to an RBI estimate, Rs 51,954 crore (Rs 519.54 billion) was held in cash by households in 2005-06. If some of these resources were parked in banks, both will gain.