Bangalore: In the budget 2012, the finance ministry has agreed to consider a proposal to reduce the lock-in period for bank deposit eligible for tax-rebate to three years from five years, which is against the norms of DTC (Direct Tax Code).

If this proposal gets accepted in this budget, then the bank FDs (Fixed Deposits) will become an attractive savings option for individuals like equity linked tax savings schemes of mutual funds and tax-free bonds. Presently an FD yields an annual return more than 9 percent.

"Among the list of demands submitted by the banks and financial institutions in their pre-budget meeting with the Finance Minister, some proposals have been short listed for further deliberations, this is one of them," said a senior finance ministry, as quoted by Economic Times.

In their pre-budget meeting with Finance Minister Pranab Mukherjee, bank officials had emphasized the need to assemble more deposits to meet the rising credit needs of the economy. They also brought out the fact that only a third of the country's savings of 32 percent of GDP are intermediated through banks.

The bank raised more FDs because of the High Interest Rates, but once the rates starts to decline, the shorter lock-in period will help to restrict the decline in mobility and will hitch the depositors from switching to other options.

"As compared to other sources, fixed deposits constitute low-cost funds. They enable banks to access funds at cheaper rates, and pass them on to borrowers relatively cheaply as well. This helps in lowering interest rates in the entire system," said Executive Director of a State Run Bank.

Financials experts say that the shorter lock-in period for FDs will mostly help the retired investors. “The risk averse investor category will benefit the most. Investor who earlier used equity-linked savings scheme or the Public Provident Fund (PPF) route will also find fixed deposits an attractive option”, said Charul Shah, a certified Financial Planner and Director at Greshma Wealth Advisors.

Presently investments up to 1 lakh in some specific schemes the is eligible for tax rebate under section 80C of the Income Tax, like various post office schemes, bank deposits, life insurance and equity-linked savings schemes, though their lock-in periods varies widely.

But tax experts and financial planners say that the proposal goes against the norms of the DTC, which has restricted tax incentives to long-term savings. "Such exemption makes no sense if the government is serious about implementing Direct Tax Code from April. Only public provident fund, EPF and new pension scheme will stand eligible for tax benefits," said Dhirendra Kumar, mutual fund expert and CEO of Value Research.