In the upcoming Budget, the government may take cognizance of the moderating deposit growth of banks amid equities emerging as a preferred investment option and is likely to announce some parity in the tax treatment of fixed deposits (FDs) with 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 12.5%, thereby reducing the effective returns on FDs for investors. In fact, returns on 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 an advantage over FDs.

“This is a tricky situation for the banking sector and is being looked into by the government,” said a source close to the development. It is believed that efforts are underway in North Block ahead of the budget to ensure that the credit-to-deposit ratio does not become skewed for the banking system in the future. Tax adjustments on FD returns are being considered, the source added, without divulging further details.

Notably, bank deposit growth moderated to 11.82% year-on-year (YoY) as of November 1, 2024, compared to 13.5% a year earlier, according to data from the Reserve Bank of India (RBI).

That said, there are no immediate risks to the deposit-credit profile of banks, according to S&P Global Ratings, though 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, would provide relief for consumption in the economy, which has recently taken a significant hit. More disposable income could lead to higher spending and increased economic activity. The Housing Consumption Expenditure Survey 2023-24 has already indicated signs of stress in the consumption economy.

mutual funds vs FDs

Budget 2025: Modi govt may revise FD tax norms to boost bank deposits amid rising equity investments