On February 28, the finance minister had announced in his Budget Speech that bank deposits would be eligible for deduction under Section 80C of the Income Tax Act. However, it was only on July 28, that the notification was finally issued.

Now bank deposits made under the special scheme called Bank Term Deposit Scheme (BTDS) will get tax deduction. This article examines the salient features of this scheme and throws up some questions for which clarifications would be required.

Salient features of BTDS

1. Section 80C is available only to individuals and HUFs (Hindu Undivided Families). It is also available to Non-Resident Indians.

We hope that an NRI can contribute through his NRE (Non-Resident External) account on a repatriable basis. However, this point needs to be clarified.

2. The amount of deposit shall be a minimum of Rs 100 or multiples thereof not exceeding Rs 1 lakh (Rs 100,000) 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 under Section 80C.

3. 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 as a 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.

4. 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 (Public Provident Fund) or the date of clearance as in the case of NSC? Again a clarification is necessary.

5. 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 (tax deduction at source) 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.

6. The term deposit shall not be pledged to secure loan or as security to any other asset.

7. BTDS shall be:

• Single holder type issued to an individual for himself or in the capacity of the Karta of the Hindu Undivided Family.
• 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 under Section 80C shall be available only to the first holder of the deposit.

8. 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.

9. 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.

10. 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.

11. 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:

1. In the case of NSC, which is basically a cumulative scheme, the amount of interest reinvested is again entitled to deduction under Section 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 Section 80C.

A clarification is necessary.

2. 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 that of the investors.

The author is Director of A N Shanbhag NR Group, a Mumbai-based tax and investment advisory firm. He may be reached at sandeep.shanbhag@gmail.com