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New scheme for fixed deposits deductible under Sec. 80C

It is understood that the Fixed Deposit Scheme for investment in banks so as to be eligible for deduction under Sec. 80C has since been notified. What are its features?

Notification No. 203 of 2006 dated July 28, 2006, has formulated a scheme for bank deposits, the income from which would be eligible for deduction under Sec. 80C. The Notification is under Sec. 80C(2)(xxi) of the Income-tax Act. It follows that only those deposits from the date on which the banks themselves accept such deposits framed under the terms of the scheme would be eligible for deduction under Sec. 80C.

There is a Press Note issued on July 31, 2006, describing the main features of the scheme. The scheme is meant for individuals and Hindu Undivided Families (HUFs) for deposit in a scheduled bank up to a maximum limit of Rs. 1 lakh. But this deduction for the deposit is subject to the over-all ceiling of Rs. 1 lakh along with other deductions already available under Sec. 80C. Joint deposits are also permitted, but the eligibility for deduction will be only to the first holder. It is further clarified that the maturity period will be five years, with the money being locked up for this period without right to encashment prior to the date of maturity. Interest on the term deposit will be one fixed by the scheduled bank from time to time, so that there is likely to be variation as between banks and at different points of time at the prevailing rate on the date of acceptance of such deposit.

It is further made clear that the interest income is not tax exempt. It will be taxable on accrual basis or receipt basis according to the regular method of accounting followed by the investor-assessee.

Tax will be required to be deducted at source, if the interest income exceeds Rs. 5,000. Deduction of tax at source is avoided by filing a self-declaration in Form 15G or 15H, as the case may be, if the investor has no liability to tax.

The scheme is open not merely to public sector banks, but also to all scheduled banks. This should be welcome, since this is a major departure from the present list of eligible investments available under Sec. 80C, which are mainly oriented towards government savings schemes.

Since the Notification prescribes continuous period of not less than five years, even the deposit scheme for a longer period subject to the lock-in period of five years should be possible. The ceiling of Rs. 1 lakh is for the assessee and not for any particular deposit with any single bank. Deposit could be for minimum amount of Rs. 100. An individual can hold deposit either in his individual capacity or as the karta of HUF. Since individuals and HUF are two different persons under the income-tax law, it follows that the ceiling of Rs.1 lakh should be separately applicable.

The nomination facility is also permissible, with right to such nomination made available at any time during the term of the deposit, but before maturity. Deposit by a minor is not prohibited, but there will be no right of nomination in such cases. Minor can be a joint-holder with an adult.

The deposit under the scheme has to be in the prescribed form with the fixed deposit receipt bearing Permanent Account Number (PAN) and signature of the assessee along with the name and address and other particulars as may be required by the bank. Inter-branch transfer of the deposit is possible.

There is a specific bar under Rule 9 of the scheme against a pledge of the deposit to secure loans or to have it accepted as security.

The Rule provides for issue of a duplicate on the original being lost, stolen, destroyed, mutilated or defaced, subject to one or more approved sureties or a bank guarantee with exception from such requirement for deposits of Rs. 500 or less. Indemnity, surety or guarantee may not be insisted upon, where the original receipt mutilated or defaced is available.

The rate of interest will be fixed by the bank and such interest may be either cumulative payable at the time of maturity in lump sum or paid every quarter or every month in accordance with the term of the deposit. Where interest is paid in lump sum at the end of the maturity, yearly rate of interest will have to be marked in the deposit certificate.

In the event of death of a holder before maturity, the nominee will be entitled to encash the same "before or after maturity of the term deposit'' under Clause 13 of the scheme on application to the bank with proof of death of the holder. Where the nominees are more than one, all the surviving nominees are to give a joint discharge for the receipt. Where there is no nomination, the legal heirs would be entitled to the same.

The power to relax the operations of any of the provisions in the scheme has been reserved by the Central Government under Clause 16 of the scheme to the extent that such relaxation is not inconsistent with the provisions of the Income-tax Act.

S. RAJARATNAM

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