Budget expectations: Union Finance Minister Nirmala Sitharaman on Thursday was asked to add some tax incentives for investment tools like fixed deposits to boost savings of the middle class. During a meeting with representatives from the financial sector, FM Sitharaman discussed the recommendation from banks to introduce tax incentives for fixed deposits (FDs) as a way to encourage savings leading up to the Union Budget 2025.
Representatives from the capital market and financial sector put forth several recommendations to the finance minister, ranging from treating fixed deposit interest as a separate entity from income tax to simplifying KYC norms for non-resident Indians (NRIs).
Currently, the interest earned from fixed deposits is taxed as regular income, which may deter individuals from choosing this savings option. Supporters suggest that linking fixed deposits to long-term capital gains tax could alleviate this tax burden and make FDs more appealing. This change could help increase individual savings and bolster banks' overall deposit base. The banking industry is currently grappling with a decrease in deposits, and this proposed adjustment aims to stimulate investment in fixed deposits and reverse this downward trend.
Besides, during the Budget consultation meeting, Radhika Gupta, the MD and CEO of Edelweiss Mutual Fund, highlighted the importance of enhancing the efficiency of capital markets and promoting greater inclusion. The proposal put forth focused on encouraging long-term saving through investments in bonds and equity shares.
Gupta reiterated the need for the finance minister to prioritise capital markets efficiency and inclusivity in the upcoming budget.
Taxation of FDs
Income earned from fixed deposits falls under the category of "Income from Other Sources" as per the Income Tax Act. The interest gained on FDs is fully taxable based on the individual's tax slab. It is essential to report this income when filing your Income Tax Return (ITR).
Before commencing the ITR filing procedure, ensure to collect all necessary documents, including:
Interest certificates: Obtain these certificates from your bank or financial institution, stating the total interest earned on your FDs throughout the financial year.
Form 26AS: This form provides information regarding the interest income and any tax deducted at source (TDS), if applicable.
Form 15G: This form is designed for individuals under the age of 60 with a total income below the taxable limit. By submitting Form 15G to your bank, you can prevent TDS deductions on your FD interest, as long as your taxable income remains under the exemption threshold.
Form 15H: Geared towards senior citizens aged 60 and above with an income below the taxable limit, Form 15H serves the same purpose as Form 15G in exempting TDS on FD interest for this demographic, provided their income remains below the exemption limit.
One must submit these forms to your bank at the beginning of the financial year to prevent TDS on your FD interest.
If TDS has already been deducted, it will show up in your Form 26AS, and you can seek credit for it when filing your ITR.
Things to note
Banks will deduct Tax Deducted at Source (TDS) from Fixed Deposit (FD) interest if it exceeds Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. It is important to verify that the TDS amount is accurately reflected in your Form 26AS.
To choose the appropriate Income Tax Return (ITR) form, consider your type of income:
ITR-1: Suitable for individuals earning income from salary, pension, and other sources, including fixed deposits.
ITR-2: Designed for individuals with more complex income sources, such as capital gains or income from multiple house properties.
For those who have invested in tax-saving fixed deposits under Section 80C, it is important to remember to claim the deductions you are eligible for. This section permits deductions up to Rs 1.5 lakh for fixed deposits with a minimum tenure of 5 years.
Choosing MFs over FDs
Fixed deposits (FDs) have long been a preferred investment option for Indians, offering a sense of security, especially with public sector banks. Nearly 15% of household savings still find their way into FDs, though many are now inclined towards mutual funds and equities.
However, the perceived safety of FDs comes with its share of risks and limitations that investors must consider before making decisions.
In August 2024, RBI Governor Shaktikanta Das flagged concerns on the widening gap between credit and deposit growth with household savings increasingly moving away from traditional deposits, urging banks to adopt new strategies to attract deposits and manage liquidity risks effectively.
Das highlighted that households and consumers who traditionally leaned on banks for parking or investing their savings were increasingly turning to capital markets and other financial intermediaries.
“While bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining with households increasingly allocating their savings to mutual funds, insurance funds and pension funds. To be precise, households are increasingly turning to other avenues for deploying their savings instead of banks,” he cautioned the banks.