Introduction
Fixed deposits (FDs) have been a cornerstone of savings for Indian households. However, their popularity has waned in recent years as individuals shift towards mutual funds and equities for better returns. Recognising this trend, the financial sector has urged the Union Finance Minister, Nirmala Sitharaman, to introduce tax incentives for FDs in the Union Budget 2025 to make them more attractive.
Key Recommendations by the Financial Sector
- Separate Tax Treatment for FD Interest: Fixed deposit interest is currently taxed as regular income under the “Income from Other Sources” category. Stakeholders propose linking it to long-term capital gains tax, which could significantly reduce the tax burden on middle-class savers.
- Simplified KYC Norms for NRIs: Financial institutions recommend easing Know Your Customer (KYC) requirements to encourage investments in FDs by non-resident Indians (NRIs).
- Focus on Long-Term Savings: Prominent voices, such as Radhika Gupta, MD and CEO of Edelweiss Mutual Fund, have emphasised the need to prioritise capital markets’ efficiency and promote savings instruments like bonds and equity shares. This complements the push for FD tax incentives, creating a balanced approach to savings.
Taxation of Fixed Deposits
Currently, the interest earned from FDs is fully taxable based on the investor’s income tax slab. Here are some key points to note:
- TDS Threshold:
- Banks deduct Tax Deducted at Source (TDS) if the interest exceeds ₹40,000 (₹50,000 for senior citizens) annually.
- Forms to Mitigate TDS:
- Form 15G: For individuals below 60 years with income under the taxable limit.
- Form 15H: For senior citizens with income below the taxable threshold.
- Tax-Saving FD Deductions:
- Under Section 80C, investors can claim deductions up to ₹1.5 lakh for tax-saving FDs with a minimum tenure of five years.
Why Tax Incentives for FDs Matter
The declining share of FDs in household savings has raised concerns for the banking sector:
- Shift in Savings Patterns: According to RBI Governor Shaktikanta Das, households are increasingly favouring mutual funds, insurance, and pension schemes over traditional bank deposits.
- Liquidity Challenges for Banks: Reduced deposits hinder banks’ ability to manage liquidity effectively. Offering tax incentives could reverse this trend by boosting FD investments.
FDs vs Mutual Funds: A Comparative Perspective
| Feature | Fixed Deposits | Mutual Funds |
|---|---|---|
| Returns | Fixed and predetermined | Market-linked, variable |
| Risk | Low risk | Moderate to high risk |
| Liquidity | Locked-in for tenure | Higher liquidity options |
| Taxation | Taxed as per income slab | Depends on capital gains |
| Ease of Investment | Simple process via banks | Requires market understanding |
While FDs are secure, their relatively lower returns and full taxability deter many young investors. Tax incentives could level the playing field, making FDs more competitive.
Recent Legal Developments in FD Taxation
- Case Study: TDS Dispute Resolution
- In a landmark ruling, the Income Tax Appellate Tribunal (ITAT) clarified that incorrect TDS deductions by banks can be challenged by taxpayers, ensuring fair treatment under the law.
- GST Implications on Financial Services
- Recent case laws have highlighted ambiguities in GST applicability for financial services, indirectly affecting the FD market. Clearer guidelines could encourage more investments.
Potential Impacts of Proposed Changes
- For Middle-Class Savers:
- Tax incentives on FDs could enhance disposable income and encourage disciplined savings.
- For Banks:
- A larger deposit base would improve liquidity and credit availability.
- For the Economy:
- Increased savings could lead to higher investment rates, bolstering economic growth.
Conclusion
As the Union Budget 2025 approaches, the focus on revitalising fixed deposits through tax incentives offers a promising avenue to encourage middle-class savings. By addressing the concerns of various stakeholders and aligning taxation policies with evolving market trends, the government can foster a balanced and inclusive financial ecosystem.