As the Union Budget 2025 approaches, the government is under pressure to introduce measures that can stimulate middle-class savings and invigorate the banking sector. Recently, Finance Minister Nirmala Sitharaman held discussions with representatives from the financial sector to explore potential tax incentives for fixed deposits (FDs) and other investment vehicles, with a focus on strengthening the country's savings landscape.
Currently, FDs remain a popular savings choice among the middle class, yet their appeal has been waning. One of the key deterrents is the tax treatment of FD interest, which is taxed as regular income, often discouraging potential investors. Introducing tax incentives or preferential treatment for FDs could rejuvenate this avenue and provide much-needed support to the banking sector, especially as deposit growth has been on a downward trajectory.
Radhika Gupta, CEO of Edelweiss Mutual Fund, also shared her perspective during these deliberations. She advocated for a more efficient and inclusive capital market environment, proposing measures that would encourage long-term savings through avenues like bonds and equity investments. These initiatives would align with the government's larger objectives of expanding financial inclusion, which could benefit the broader economy by drawing in more retail investors.
Meanwhile, as savings habits evolve, mutual funds have emerged as a growing competitor to FDs. While FDs continue to command nearly 15% of household savings, the shift towards mutual funds and equities is becoming increasingly evident. This transition was also highlighted by RBI Governor Shaktikanta Das, who called on banks to innovate and address the growing gap between credit growth and deposit growth.
The government's upcoming budget presents a crucial opportunity to strike a balance between traditional savings instruments like FDs and newer, more dynamic options such as mutual funds and equities. By introducing tax incentives for FDs, simplifying tax compliance, and promoting inclusivity in capital markets, the government could stimulate savings and support broader economic goals, all while fostering a more resilient and diversified financial ecosystem.
For individuals, simplified tax procedures could make investing in FDs more attractive. Currently, the interest earned on FDs is taxed under the "Income from Other Sources" category, with the rate depending on an individual's income tax bracket. To ease compliance, tax-saving tools such as submitting Form 15G or 15H can help eligible individuals, especially senior citizens, avoid Tax Deducted at Source (TDS) on their FD earnings.
Ultimately, a comprehensive framework that encourages both traditional and modern savings options could provide the necessary impetus for the banking sector and the broader economy. It would also align with the government's goals of fostering a more inclusive, dynamic, and sustainable financial system.
