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China's State Council announced Friday to reduce the tax on interest income from 20 to 5 percent as of August 15.

The move is to adapt to changes in China's economic and social situation, the State Council, or cabinet, said in a statement.

It received authorization to scrap or cut the tax for banking savings from the Standing Committee of the National People's Congress on June 29.

Experts say the move aims to narrow the gap between deposit rate and inflation to make bank savings more attractive and to curb the excess liquidity.

The reduction in interest income tax will increase earnings from bank savings and is conducive to the economy featured now by rapid increases in investment and rising inflation, the State Council said in a news release.

China's gross domestic product grew by 11.5 percent year-on-year in the first half of 2007, 0.5 percentage point higher from the previous year, and the fixed assets investment soared 25.9 percent, the National Bureau of Statistics said on Thursday.

The consumer price index (CPI), the main gauge of inflation, rose 3.2 percent year-on-year in the first half of this year. In June, the CPI jumped by 4.4 percent from a year earlier, the highest in 32 months and well above the government's target of 3 percent for 2007.

China began to levy tax on bank savings in November 1999. In the past eight years, the tax has played a positive role in encouraging consumption and investment, adjusting personal earnings and increasing fiscal revenues, said the news release.