Mumbai, Feb. 28: Bank fixed deposits have finally been included in the tax-saving instruments under section 80C.

According to the Union budget proposals, fixed deposits in scheduled commercial banks with at least five-year maturity period will get tax exemption for savings under section 80C of the income tax act.

This has brought a much-awaited relief to both investors and bankers and was in line with the expectations for the banking sector.

The banking community should heave a huge sigh of relief since this was their major demand at a time when deposit growth has failed to keep pace with that of advances.

“This is a highly welcome move as it will bring about the much-needed liquidity into the banking system,” said Cherian Verghese, chairman and managing director of Union Bank of India. There were growing concerns among bankers over a liquidity crunch with bank advances escalating at a rate of above 30 per cent while deposits were growing below 20 per cent. The incremental credit deposit ratio was more than 100 per cent.

Bankers wanted the benefit as bank deposits were facing tough competition from post office and other tax saving instruments.

The proposal to include ATM operations under service tax, however, came as a disappointment to the banking community. However, senior executives from leading private sector and nationalised banks are ambiguous on whether the service tax will have to be borne by their customers while transacting business at the ATM.

However, the finance minister had pointed out that service tax on ATM operations would not make any impact on individual transactions conducted through this channel.

Bankers, particularly those from the public sector, are happy with the Union Budget 2006-07. Notwithstanding the higher farm credit target set by finance minister P. Chidambaram, banks are elated at the prospects of getting additional capital by selling special securities that were issued by the government.

As part of the reforms in the banking sector introduced in 1993-94, capital was infused in nationalised banks by issuing special securities. While presenting the budget proposals, Chidambaram said the government has injected Rs 16,809 crore into the public sector banks till date. Taking into consideration the perpetual securities issued earlier, the total net capital support stands at Rs 22,808 crore.

“Thanks to the capital support, a sound banking sector meeting international norms has emerged. We have reached a stage when we can wind up the special arrangements between the government and the banks,” the finance minister said while giving the go-ahead to banks to sell these securities. As part of the capital infusion, the government granted funds to nationalised banks in lieu of the latter issuing additional shares. The cash received was invested in perpetual government securities. Banks were earlier barred from selling these securities.

However, with the finance minister now allowing them to sell these perpetual securities, senior bankers like K. Cherian Varghese, chairman and MD of Union Bank are a happy lot. “This will give additional capital to the banks,” he said.

This bonus capital comes at a time when demand for funds from corporate and retail sectors is growing and the growth of deposits has failed to keep pace with the demand for funds. Among the public sector banks, UBI itself holds close to Rs 145 crore of such securities.