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Budget 2014: Government may give tax breaks on bonds issued by public sector banks; move to help them meet capital requirements
June, 23rd 2014

State-owned banks' need for funds and the government's inability to help out could spell an opportunity for ordinary tax payers. The budget may see tax breaks on bonds issued by public sector banks to help them meet capital requirements and drive long-term savings.

The government is mulling tax breaks on additional tier-I bonds issued by banks under Basel-III guidelines.

"We are examining the possibility of tax incentives on such instruments," said a finance ministry official, adding that these could be along the lines of infrastructure bonds. "We are assessing if such a rebate will actually help channelise longterm savings into the banking sector," said the official.

Tier-I bonds under Basel-III guidelines come with so-called loss absorbency features, which means that banks can write off such investments in case of stress.

The previous United Progressive Alliance government did not allot tax-free bonds for state-run companies in the interim budget. The 2012-13 budget axed the tax-saving infrastructure bonds, which had offered a .`20,000 deduction in addition to the existing .`1 lakh deduction available under the popular Section 80C basket.

The finance ministry wants banks to explore alternate measures of raising capital. Financial services secretary GS Sandhu has already ruled out higher fund allocations in the forthcoming budget to recapitalise government-owned lenders.

The government allocated.`11,200 crore towards bank captilisation in the interim budget, substantially lower than the amount infused in previous years. State-run banks need about .`4.15 lakh crore to meet Basel-III norms, according to the Reserve Bank of India. A fiscally-constrained government will not be able to capitalise banks over a long period.

The banks are also in talks with RBI to mitigate the risk associated with such bonds and make them more attractive.

"Discussions are on with the regulator if it can allow banks to write back such investments in case a bank turns around and posts profits," said the official cited above.

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