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Interest from fixed deposits is taxed as per the investor’s income bracket. Hence may prefer to avail low-tax options like mutual funds over fixed deposits for savings
Banks may have advocated for tax incentives on fixed deposits to stimulate savings growth. (Representative/Shutterstock)
Ahead of the presentation of Union Budget 2025, speculation is mounting that individuals who save money in bank Fixed Deposits (FDs) might receive significant tax relief. Currently, interest earned on bank FDs is taxed according to the individual’s income tax bracket.
However, it has been reported that banks have advocated for the removal of this income tax on interest earned from FDs. If implemented, this measure could substantially benefit individuals who rely on FDs for savings and income.
Reports suggest that during a pre-budget meeting with Finance Minister Nirmala Sitharaman, financial institutions, particularly banks, may have advocated for tax incentives on fixed deposits (FDs) to stimulate savings growth. This suggestion comes in the wake of a recent dip in savings, which has led to banks experiencing a shortage of funds available for lending.
Facility Sought on Bonds and Shares
It has been reported that Radhika Gupta, Managing Director and Chief Executive Officer (CEO) of Edelweiss Mutual Fund, proposed enhancements to capital market efficiency and inclusivity during the pre-budget meeting with the Finance Minister. She stated that recommendations were put forward to promote long-term savings in both bonds and equity shares.
The meeting was also reportedly attended by the Finance Secretary, DIPAM (Department of Investment and Public Asset Management) Secretary, Department of Economic Affairs and Financial Services Secretary, and Chief Economic Advisor.
Long-Term Capital Gains Tax on FDs?
Sources suggest that bank representatives have proposed linking Fixed Deposits (FDs) with long-term capital gains tax (LTCG) rather than taxing them under the income tax slab to encourage deposits.
Currently, interest earned from fixed deposits is taxed according to the investor’s income tax bracket. This practice encourages individuals to invest their savings in low-tax options like mutual funds instead of fixed deposits.
How Would This Be Beneficial?
If someone has a fixed deposit (FD) of Rs 10 lakh with an annual interest rate of 8 per cent, they will earn a total interest of Rs 4 lakh over five years. Assuming they fall in the 30 per cent income tax slab, there is no tax on FD interest up to Rs 40,000; above this threshold, tax is payable according to the slab rate.
This means they would have to pay 30 per cent tax on Rs 3.60 lakh, totalling Rs 1.08 lakh in tax. However, if long-term capital gains tax (LTCG) were applicable, they would pay a lump sum tax of 12.5 per cent, and the total tax would only be Rs 45,000. This way, they would save around Rs 63,000.
