As the Union Budget 2025 approaches, expectations rise for measures that can stimulate middle-class savings and rejuvenate the banking sector.
Finance Minister Nirmala Sitharaman recently met with representatives from the financial sector to deliberate on tax incentives for fixed deposits (FDs), amongst other investment tools.
Here’s a closer look at the discussions and proposals shaping this narrative.
TAX RELIEF FOR FIXED DEPOSITS
Representatives from banks and capital markets proposed treating FD interest as distinct from regular income tax or linking it to long-term capital gains tax.
Such measures could make FDs more attractive, addressing declining deposit growth and encouraging middle-class savings. Currently, FD interest is taxed as regular income, which may deter potential investors.
BOLSTERING CAPITAL MARKETS
Radhika Gupta, CEO of Edelweiss Mutual Fund, emphasised the need for greater efficiency and inclusivity in capital markets. She proposed incentives for long-term savings through bonds and equity investments, aligning with the government’s broader goals of financial inclusion.
TAXATION AND COMPLIANCE FOR FDs
Interest earned on FDs is categorised as “Income from Other Sources” under the Income Tax Act and taxed according to individual tax slabs. To simplify tax compliance, individuals should gather essential documents like interest certificates and Form 26AS.
Submitting Form 15G or 15H at the start of the financial year can help eligible individuals and senior citizens avoid Tax Deducted at Source (TDS).
MUTUAL FUNDS: A GROWING CONTENDER
While FDs remain a staple for household savings, their dominance is waning. Nearly 15% of household savings still flow into FDs, but mutual funds and equities are gaining ground. RBI Governor Shaktikanta Das has highlighted the shift towards these avenues, urging banks to innovate and bridge the gap between credit and deposit growth.
Budget 2025 presents an opportunity to balance traditional and modern savings instruments. By introducing tax incentives for FDs and enhancing capital market inclusivity, the government can bolster middle-class savings while addressing broader economic goals. A reimagined framework for savings could provide the much-needed impetus for both individuals and the financial sector.