Budget 2025: Government May Adjust FD Tax to Boost Bank Deposits Amid Rising Equity Investments
The government is considering revising the tax treatment of fixed deposits (FDs) to make them more attractive for investors, especially as equities have become a preferred choice.
Budget 2025Fd TaxBank DepositsEquity InvestmentsTax RationalizationReal EstateJan 11, 2025
The government is likely to announce measures to create parity in the tax treatment of fixed deposits (FDs) and equity instruments.
Currently, term deposits in banks are taxed at the income tax slab rate, whereas long-term capital gains (LTCG) on equity mutual funds and similar instruments are taxed at a lower rate of 12.5%.
This disparity reduces the effective returns on FDs for investors.
Even hybrid mutual funds, designed for risk-averse investors, qualify for a 12.5% LTCG rate if they have an equity exposure of over 65%, giving them a significant advantage over FDs.
“This is a tricky situation for the banking sector and is being closely monitored by the government,” said a source close to the development.
Efforts are underway in North Block to ensure that the credit-to-deposit ratio does not become skewed in the future.
Tax adjustments on FD returns are being considered, though the specifics have not been disclosed.
According to data from the Reserve Bank of India (RBI), bank deposit growth has moderated to 11.82% year-on-year (YoY) as of November 1, 2024, down from 13.5% a year earlier.
Despite this, S&P Global Ratings believes there are no immediate risks to the deposit-credit profile of banks.
However, the agency has not ruled out the possibility that deposit growth may struggle to keep pace with credit momentum in 2025.
Any rationalization of FD taxation, if announced in the budget, could provide significant relief for the economy, which has recently faced a hit in consumption.
Higher disposable income could lead to increased spending and economic activity.
The Housing Consumption Expenditure Survey 2023-24 has already highlighted signs of stress in the consumption economy.
The government's decision to revise FD tax rates could not only boost bank deposits but also help in stabilizing the financial system.
By making FDs more attractive, the government aims to encourage more people to save, which in turn can support the overall economic growth and stability.
Frequently Asked Questions
Why is the government considering revising the tax treatment of fixed deposits?
The government is considering revising the tax treatment of fixed deposits (FDs) to make them more attractive for investors, especially as equities have become a preferred choice, leading to a moderation in bank deposit growth.
What is the current tax rate on term deposits in banks?
Currently, term deposits in banks are taxed at the income tax slab rate, which varies depending on the individual's income level.
What is the tax rate on long-term capital gains from equity mutual funds?
The long-term capital gains (LTCG) on equity mutual funds and similar instruments are taxed at a lower rate of 12.5%.
How has bank deposit growth been affected recently?
Bank deposit growth has moderated to 11.82% year-on-year (YoY) as of November 1, 2024, down from 13.5% a year earlier, according to data from the Reserve Bank of India (RBI).
What potential impact could the rationalization of FD taxation have on the economy?
Rationalizing the tax treatment of FDs could provide relief for consumption in the economy, increase disposable income, and lead to higher spending and increased economic activity.
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