The Modi government’s full Budget 2026, likely to be presented on 1 February 2026, may bring big relief for people who invest in bank Fixed Deposits (FDs). Banks and finance-sector bodies have officially asked the Finance Ministry to reduce or change the way tax is charged on FD interest, so that small savers can keep more of their earnings.
How FD Interest Is Taxed Right Now
- Interest from FDs is fully taxable as “income from other sources” at your normal slab rate (5%, 10%, 20% or 30% depending on your total income).
- Banks also deduct TDS, usually 10%, if your annual FD interest crosses ₹50,000 for non-senior citizens and ₹1 lakh for senior citizens in FY 2025‑26.
- Because of this high tax burden, many people have started shifting money from FDs to mutual funds and other products.
What Banks Have Demanded Before Budget 2026
In pre‑Budget meetings with Finance Minister Nirmala Sitharaman, banks and NBFCs made some key requests:
- Lower tax on FD interest so that deposits become more attractive again.
- Consider linking FD tax with Long‑Term Capital Gains (LTCG) instead of slab rates, which would mean a single, lower tax rate (LTCG is currently 12.5% for many assets after Budget 2024).
- Some experts have even suggested temporary or partial tax exemption on long‑term FDs to boost savings and bank liquidity.
How Much Tax Saving Is Possible (Illustration)
Suppose someone puts ₹10 lakh in a 5‑year FD at 8% interest:
- Total interest over 5 years ≈ ₹4 lakh.
- After the basic TDS‑free limit (for example ₹50,000 in a year), the remaining interest is taxed.
- If taxed at a 30% slab, tax on ₹3.6 lakh of taxable interest is about ₹1,08,000.
- If instead FD interest is taxed like LTCG at 12.5%, tax would be about ₹45,000 on the same amount, giving a saving of roughly ₹63,000—more than half the original tax outgo. (Numbers are rounded for simplicity and match the type of examples used by tax planners.)
Why the Government Is Being Pressured
- Inflation has reduced real savings, and households are finding it harder to put money aside. Banks argue that tax relief on safe products like FDs will push people back towards guaranteed‑return savings.
- Banks and NBFCs also want a stronger deposit base to fund loans at reasonable rates; cheaper, stable deposits via FDs help them lend more to MSMEs and retail borrowers.
- Capital‑market experts like Radhika Gupta of Edelweiss MF have, in the same meetings, also asked for broader tax reforms on bonds and equity along with changes in FD taxation, to deepen long‑term savings.
