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February 28, 2001                                       Feedback  

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IBA to move finance ministry over TDS on deposits

BS Banking Bureau

The Indian Banks' Association is planning to move the finance ministry to reverse the Budget proposal of bringing down the threshold limit for attracting tax deductible at source (TDS) on interest income from bank deposits to Rs 2,500 from the Rs 10,000.

In a parallel development, primary dealers (PDs) -- planning to retail government securities -- are gung ho as investments in these financial instruments does not attract TDS.

According to Indian Banks' Association (IBA) chief executive and secretary, K C Chowdhary, this will only lead to the splitting of deposits by customers so as to avoid attracting TDS, thereby compounding the work of the banks. Besides ensuring compliance with the TDS, they will have to prepare statements in this regard for the deposit holders.

He said the IBA after consulting the constituent banks will approach the finance ministry for reconsideration of the proposal. In fact the central banking body had originally called for raising the threshold to Rs 50,000.

"Splitting of deposits is not a new phenomenon and depositors were resorting to it earlier also to skirt the TDS. The only problem is that it will increase the workload of banks as TDS will have to calculated and remitted to the IT department and customers will have to provided with the statements," said an official of Union Bank of India.

According to IDBI bank managing director and CEO, Gunit Chadha, the slashing of TDS on bank deposits will create operational inefficiencies and will lead to individuals breaking their deposits among several banks. "There could, however, be an increase in deposits for newer banks like us as we are increasing our retail outlets. The government needs to review this decision," he said.

Says Indus Ind Bank bank's senior vice-president, Suresh Pai,: "The finance minister has widened the tax net by bringing down the TDS ceiling on bank deposits. However our volumes of work will increase as customers may now go in for smaller deposits. Also in order to avoid TDS they may deposit the money in different banks.

However banks will benefit as we expect more deposits to flow in as had happened before customers had bifurcated their deposits when they saw that the interest had increased by more than Rs 10,000. Now with the slashing of the TDS to Rs 2,500 customers may deposits in lower amounts and also in different banks so as to escape the TDS.

The TDS on bank deposits coupled with the reduction in the exemption level under section 80L of the I-T Act to Rs 9,000 from Rs 12,000 should give a boost to the gilts as there is no TDS," Arun Kaul, managing director, PNB Gilts said.

Source: Business Standard

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