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

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Banks have noted that they are at a disadvantage when it comes to their fixed deposit (FD) schemes as compared to mutual funds and insurance schemes that offer tax relief to customers. A report in ET states that banks have reportedly written to the Union finance ministry ahead of the Budget 2023 session that investments in FD schemes up to Rs 5 lakh should be made tax-free.

As per reports, banks want the returns on small deposits to be competitive with small savings mutual fund schemes and insurance products.

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

As per news reports, banks are falling behind with deposit insurance schemes despite offering good and attractive rates. MF and insurance products offer high tax-free returns.

An official involved in the meeting said that banks have told that they are losing customers to schemes like National Savings Schemes, mutual funds and insurance products, which offer tax-free benefits to small customers. “We have written to the finance ministry to bring in provisions that make small value deposits more attractive,” he said.

Tax paid on FD return

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

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

Further, if the interest earned exceeds Rs 40,000 for individuals and not for senior citizens, banks will deduct 10 per cent at source (tax deducted at source) after the maturity of the scheme and the interest is credited. For senior citizens, this limit is Rs 50,000.

tax return on mutual funds

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

Also, most debt funds have the benefit of indexation, which means that the tax payment will be done after adjusting for inflation.

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