Fixed deposits: Budget 2025 tax incentives may impact interest rates

Can fixed deposit and recurring deposit rates be altered in Budget 2025? No. However, while the Budget may not directly affect interest rates for FDs and RDs, it could influence them indirectly through taxation and savings incentives. “For example, tax benefits under section 80C might be introduced to promote public savings,” said Ashish Agrawal, Partner, Dhruva Advisors, a Mumbai-based tax and regulatory services firm.

 

The Reserve Bank of India (RBI) pays close attention to announcements in the Budget.

 

Fixed deposits (FDs) remain one of the most popular investment options for Indians, not only for their steady returns but also for their role in contributing to bank deposits. However, banks have recently seen a dip in deposits as many investors are opting for equity schemes, attracted by their lower tax rates and shorter lock-in periods.  

 

Currently, the interest earned on FDs is taxable, and if the amount exceeds Rs 40,000 (Rs 50,000 for senior citizens), it becomes subject to Tax Deducted at Source (TDS).  

 

Call for tax incentives in Budget 2025  

 

Earlier this month, Union Finance Minister Nirmala Sitharaman was urged to introduce tax incentives for fixed deposits in the upcoming Union Budget 2025. The request, made during a meeting with financial sector representatives, is aimed at boosting middle-class savings.  

 

“In the 2025 Budget, it is anticipated that the government may introduce tax relief for these deposits, potentially aligning their tax treatment with equity investments. This could make bank deposits more appealing to investors,” said Adhil Shetty, CEO of Bankbazaar.com. He added that a possible cut in the repo rate could lead banks to offer higher FD rates.  

 

Factors influencing FD and RD interest rates  

 

Several factors determine the interest rates offered by banks for fixed and recurring deposits, explains Shetty:  

 

RBI monetary policy: Repo rate changes by the Reserve Bank of India directly impact deposit rates, with higher repo rates generally leading to higher returns on deposits.  

Inflation: To ensure depositors earn real returns, banks adjust rates based on inflation trends.  

Economic conditions and liquidity: In times of economic growth or liquidity shortages, banks may raise deposit rates to attract more funds.  

Demand for credit: High demand for loans can push banks to offer better deposit rates to secure funding.  

Government policies: Budget announcements can introduce new tax rules or incentives that indirectly affect deposit rates.  

International interest rates: Global trends can also influence domestic deposit rates, especially for banks with international exposure.  

 

Shetty further explained how these elements interact. “Economic conditions, liquidity, and even competition among banks play a role. For example, during periods of strong credit demand, banks may raise FD rates to mobilise funds,” he said.