Budget 2023: Banks want FDs to become tax-free to compete with mutual funds, insurance products

Banks have noted that they are at a disadvantageous position when it comes to their fixed deposit (FD) schemes vis-a-vis mutual funds and insurance schemes which offer tax relief to customers. The banks have reportedly written to the Union Finance ministry ahead of the Budget 2023 session that investment in FD schemes of up to Rs 5 lakh should be made tax-free, a report in ET said.  

The banks, as per the report, want small-ticket deposit returns to be competitive with small savings mutual fund plans and insurance products.    

As per the report, the Indian Banks Association (IBA), the representative body of management of banking in India, has written to the Finance ministry on behalf of the banks that have reported a slump in FD growth.  

As per news reports, bank deposits have continued to lose out to insurance schemes despite offering decent and attractive rates. The MF and insurance products offer high tax-free returns.

An official, who was part of the meeting, said that banks have reported that they are losing out customers to schemes such as national savings schemes, mutual funds, and insurance products, which offer tax-free benefits to small customers. “We have made written to the finance ministry to bring in provisions that make small value deposits more lucrative," he said.

Tax paid on FD returns

Even though fixed deposits are one of the most popular forms of investment tools in the country, the returns on FDs are taxable, and so post-tax returns from FDs are low.

The Income Tax Act, 1961, notifies that the interest on fixed deposits is termed as the ‘income from other sources’ and is fully taxable. The interest earned on a fixed deposit is taxable as per the investor’s income tax slab. For example, if the interest rate of the FD is 6 per cent, the post-tax rate will be 4.2 per cent, if the investors fall within the 30 per cent bracket.  

Besides, if the interest earned is above Rs 40,000 for individuals, not senior citizens, banks will deduct 10 per cent at source (Tax Deducted at Source) after the scheme matures and the interest is credited. For senior citizens, the limit is Rs 50,000.  

Tax returns on mutual funds

When it comes to debt funds, the gains are also taxable but are done depending on the tenure. If debt funds are held for less than three years, the gains will be taxed at the same rate as the interest from fixed deposits. But for the long-term period, the debt fund is taxed at 20 per cent.  

Also, most debt funds carry indexation benefits, meaning tax payments will be done after adjusting for inflation.