As the Union Budget 2025 approaches, Finance Minister Nirmala Sitharaman is actively engaging with representatives from the financial sector to consider key recommendations aimed at boosting middle-class savings. Among the proposals, a significant focus is on tax incentives for fixed deposits (FDs) to encourage investment in this traditional savings tool.
Recommendations for Tax Relief on FDs
During a consultation meeting on Thursday, financial sector representatives, including major banks, suggested treating fixed deposit interest separately from regular income tax. Currently, FD interest is taxed as per the individual’s income tax slab under "Income from Other Sources," which many believe discourages potential investors.
Proposals included:
- Linking FD interest to long-term capital gains tax instead of regular income tax.
- Simplifying KYC norms for non-resident Indians (NRIs) to attract global investments in FDs.
- Introducing additional tax-saving features to make FDs more competitive with instruments like mutual funds and equities.
These changes are expected to not only stimulate individual savings but also strengthen banks' deposit bases, which have been declining in recent years.
Challenges in FD Taxation
Under the current system:
- Interest earned on FDs is fully taxable, discouraging middle-class savers.
- Banks deduct Tax Deducted at Source (TDS) on FD interest exceeding ₹40,000 per annum (₹50,000 for senior citizens).
- Investors are required to submit Form 15G/15H to prevent TDS deductions if their income is below the taxable threshold.
Additionally, the lack of flexibility in FD taxation compared to mutual funds and other investment options has been a concern for many depositors.
Shift Towards Mutual Funds and Capital Markets
In recent years, household savings have been gradually shifting from fixed deposits to mutual funds, equities, and insurance products. This trend was highlighted by RBI Governor Shaktikanta Das, who expressed concerns over the widening gap between credit and deposit growth.
According to Shaktikanta Das, while fixed deposits remain a dominant savings tool, their share has been steadily declining as households explore higher-yielding investment avenues. This shift underscores the need for innovative tax incentives and strategies to make FDs attractive again.
Focus on Capital Market Efficiency
At the same meeting, Radhika Gupta, MD and CEO of Edelweiss Mutual Fund, emphasized the importance of improving capital market efficiency and promoting inclusivity. She called for policy changes to encourage long-term savings through investments in bonds and equities, complementing the ongoing discussions on fixed deposit incentives.
Tax-Saving Opportunities for FD Investors
Investors can still benefit from tax-saving fixed deposits under Section 80C of the Income Tax Act, which allows deductions up to ₹1.5 lakh for FDs with a minimum tenure of five years. This remains a key attraction for risk-averse investors.
What to Expect in Budget 2025
With middle-class savings in focus, the Union Budget 2025 could introduce landmark changes to fixed deposit taxation. These reforms may align with broader efforts to boost household savings, attract NRI investments, and address liquidity concerns in the banking sector.
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