 "Budget 2025: Experts urge govt to rethink FD tax rules for investors")
Budget 2025 for Fixed Deposit Investors: In two weeks, Finance Minister Nirmala Sitharaman will unveil the much-anticipated Union Budget for 2025. Recent volatility in Indian stock markets has heightened investor concerns, as foreign investor outflows, global consolidation, and a strengthening dollar continue to impact emerging markets.
The Nifty 50 has plunged nearly 12% since its September 2024 highs, touching lows of around 23,250 in January 2025. This has left many investors contemplating whether to prioritise safer investment options like fixed deposits (FDs). But what changes, if any, could the Budget bring for FD investors?
Will Budget 2025 make fixed deposits more attractive?
“Tax efficiency is one of the main aspects investors consider while deciding where to invest,” said Adhil Shetty, CEO of Bankbazaar.com. “Currently, interest earned on bank FDs is taxed as per the individual’s income tax slab, which makes them less appealing compared to market-linked instruments like equities.”
One potential Budget announcement investors are hoping for is a change in the tax treatment of FDs. “If the government revises the direct tax code to allow deductions or exemptions on FD interest income, it would be a game-changer for investors. Measures like reducing the lock-in period for tax-saving FDs from five years to three years could also make them more attractive,” Shetty explained.
The issue of taxation on FD interest is particularly important for senior citizens, who often rely heavily on such instruments for their income. “With rising inflation and healthcare costs, senior citizens would welcome an increase in the deduction limit under Section 80TTB from Rs 50,000 to Rs 1 lakh. This could significantly ease their financial burden,” he added.
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Could deduction limits under Section 80C be increased?
Another area of focus is the deduction limit under Section 80C, which currently stands at Rs 1.5 lakh. This limit covers a range of savings instruments, including Public Provident Fund (PPF), National Savings Certificates (NSC), and tax-saving FDs.
“There is a growing demand to increase this limit,” Shetty noted. “The current threshold doesn’t reflect inflationary pressures or the higher savings needs of individuals. If the limit is raised, it could encourage more people to save in secure instruments like fixed deposits.”
Increasing tax benefits for FDs could also have a positive ripple effect on the banking sector. “Banks rely on fixed deposits as a critical source of funding,” Shetty said. “If FDs become more tax-efficient, it would likely lead to increased deposits, providing banks with more resources for lending.”
FDs may still lag behind equities
Despite their safety, FDs have limitations that make them less appealing for certain investor groups. “One drawback of FDs is that their returns don’t always outpace inflation, especially during periods of high inflation. For those in higher tax brackets, the tax on interest income further erodes real returns,” Shetty explained.
For risk-averse investors, however, the guaranteed returns of FDs can still outweigh the uncertainty of equities. “Potential changes in tax treatment could make FDs more competitive with market instruments, particularly for retirees and those nearing retirement,” he added.
In addition to tax benefits, some experts believe the government could consider introducing incentives for long-term fixed deposits. These incentives might encourage greater financial discipline among investors.
“Many institutions are doing excellent work in promoting financial education and debt literacy,” said Shetty. “While mutual funds have gained traction as a wealth-building tool, fixed deposits remain an important savings instrument for millions of Indians.”
Do FDs have the potential to regain their popularity?
FDs remain a cornerstone of savings for many Indian households, but their role as a preferred investment has diminished in recent years. “According to a Jefferies report, about 13% of Indian household assets are in bank deposits, including FDs, compared to just 6% in equities,” said Vivek Sharma, Investment Head at Estee Advisors. “However, FDs are more of a savings option than an investment option. Their returns, which typically range between 6% and 8%, barely keep up with inflation.”
Sharma noted that the infrastructure for investing in equities and mutual funds has improved significantly, making it easier for retail investors to enter the market. “Retail inflows into equity mutual funds have remained strong, even during recent market declines. Over the last four months, equity schemes have attracted over Rs 1.5 lakh crore, despite a 10% drop in market levels,” he said.
With equities making up only a small portion of Indian household assets, Sharma sees ample room for growth in this segment. “The trend of retail investors using market corrections as entry points is unlikely to reverse. Rising disposable incomes and increasing financial literacy are key drivers of this shift,” he added.
Balancing equity and fixed-income investments
While FDs provide stability, experts caution against relying on them exclusively. “We believe recent market volatility won’t make FDs the preferred choice for most investors,” said Rahul Jain, President at Nuvama Wealth. “Instead, market corrections should be viewed as opportunities to increase equity exposure. However, maintaining a balanced asset allocation strategy is crucial.”
Jain also noted that the government’s focus on promoting the new tax regime might limit the introduction of additional tax-saving schemes for FDs. “The existing 5-year tax-saving FD offers benefits under Section 80C, but we don’t anticipate any major changes in this space,” he said.
The role of FDs in a broader economic context
Sharma expressed concerns about promoting FDs at the expense of other financial instruments. “Encouraging FDs with new tax-saving schemes could hinder the development of India’s bond market, which is already shallow,” he said.
The Association of Mutual Funds in India (AMFI) has proposed introducing Debt Linked Savings Schemes (DLSS) to incentivise investments in debt mutual funds. “This move could strengthen the bond market, reducing pressure on banks and freeing up funds for small and medium enterprises,” Sharma said.