Fixed deposit investors may soon have a reason to celebrate as Finance Minister Nirmala Sitharaman makes an important announcement in the upcoming Union Budget for FY 2025-26. In recent years, banks have faced liquidity challenges due to the decline in popular FDs, especially due to the growing preference for mutual funds. To counter this, measures can be taken to reduce FDs, such as income tax exemption for three years (rather than five years) and tax exemptions on FD income, could be introduced.
Decline in FD investments a concern
The shift to mutual funds through SIPs (Systematic Investment Plans) has adversely affected traditional banking instruments like FDs. Former Reserve Bank of India Governor Shakti Kant Das had earlier suggested that banks should introduce new strategies to increase reserves. Experts in the banking and finance sector echoed similar sentiments and recommended specific measures to the finance minister to encourage FD investment.
Boosting savings through tax incentives
In pre-monetary discussions with financial institutions, banks suggested offering tax incentives on long-term deposits to encourage savings. Radhika Gupta, MD and CEO, Edelweiss Mutual Fund, disclosed that the discussion made recommendations to improve efficiency and inclusion in the capital markets. The recommendations include encouraging long-term savings such as bonds and equity shares.
The meeting with finance and capital markets representatives was part of a series of pre-budget discussions chaired by the finance minister. It was attended by officials including finance secretary, DIPAM secretary and Chief Economic Advisor.
Expected announcements in the budget
- Tax exemptions for FDs: Tax relief on income generated from fixed deposits and shorter lock-in periods for tax-saving FDs.
- Funds for MSMEs and green initiatives: Specific funds could be allocated to institutions like SIDBI and NABARD to support MSMEs and eco-friendly initiatives like electric vehicles.
- Inclusion of small NBFCs: Lowering the SARFAESI Act limit from ₹20 lakh to enable smaller NBFCs to benefit.
- Incentives for capital gains tax: Linking long-term capital gains tax with term deposits to encourage savings.
Budget presentation
The Union Budget for FY 2025-26 will be presented on February 1, and these measures, if implemented, are expected to revive interest in fixed deposits and address the liquidity challenges faced by banks. This could also encourage investors to diversify their savings portfolios while promoting long-term financial security.
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