RBI, banks pitch for higher incentives for savings under sec 80C

The Reserve Bank of India (RBI) and the financial sector bosses have asked for higher incentives for savings. This includes raising the tax benefit for investing money in fixed deposits and public provident fund (PPF) to Rs 2.5 lakh from current Rs 1.5 lakh. Besides, bankers also demanded tax should be deducted on interest of above Rs 50,000 as against the current Rs 10,000. This suggestion has come amid recommendations from some private sector bankers that the government should lower the quantum of tax-free bonds that are issued.

Bankers said that there is a need to increase the savings rate in the economy and take it back to 35% of GDP and stated that  enhancing section 80C (of Income Tax Act) to Rs 2.5-3 lakh will be helpful. Further the bankers said that the ceiling should be enhanced, especially at a time when real interest rates had turned positive after several years.

Banks as well as the RBI have been demanding the change to ensure that investors don't park funds in PPF and National Savings Scheme, which offer higher rates, and instead opt for fixed deposits with banks. Bankers say higher deposit rates don't allow them to lower lending rates, something that the government has been seeking.

As per the current rules, the government allows deduction of up to Rs 1.5 lakh for investment in various savings instruments such as fixed deposits with tenure of five years or more, provident fund, PPF and life insurance schemes.