Budget 2022: Why Tenure of Tax Saving Fixed Deposits Should Be Reduced To 3-Years?

The central bank in its last monetary policy meeting opted to keep repo rates steady due to the slowdown in the economy induced by COVID-19, resulting in interest rates on fixed deposits (FDs) being at a downtrend as banks and NBFCs have been cutting rates over the past 1-year and more. And these steady rates simply imply that fixed deposit (FD) investors will have to endure for interest rates to start rising again.

As a result, debt investors are no longer finding fixed deposits as an attractive risk-free investment option due to the low-interest rates and rising inflation on the other hand. What makes them consider is to look for small savings schemes of the Department of Post or mutual funds depending on their risk profile. Although some banks, such as State Bank of India, HDFC Bank, ICICI Bank, and Axis Bank, have already begun hiking their short-term deposit interest rates, the concern for long-term investors remains active, as banks always hike their short-term deposit interest rates first and not on long-term deposits whenever the interest rate rare cycle pedals up.

Generally, for long-term investors investing fixed deposits for 5 years is recommended, which allows them to avail tax deductions up to Rs. 15 lakhs under section 80C of the Income Tax Act. Deposits with an option of income tax deduction are generally the lock-in deposits that allow the investors to stay invested for 5 years. However, there is an Equity Linked Savings Scheme (ELSS) that enables an individual or a HUF to claim up to Rs. 1.5 lacs from total income under Sec 80C of the Income Tax Act 1961. It is the only tax-saving investment strategy with a 3-year duration that results in a reduction in your tax burden. Because of the risk involved, ELSS has historically proved to have the best potential for generating higher returns when compared to other tax-saving schemes. However, this is only achievable if an investor commits to a 5-year investment period. Both tax-saving fixed deposits and ELSS provide tax benefits but the low-interest rates is the only concern on fixed deposits, what should fixed deposit investors do in such a case or what can they anticipate from the Union Budget 2022-23, which will be released on February 1?

Budget 2022 may bring some good news, as the Indian Banks' Association (IBA) has submitted a proposal to the finance ministry. IBA has submitted a proposal to the government, according to numerous media outlets, saying that "As compared to other financial products (such as ELSS) available in the market, the tax-saver fixed deposit (FD) has become less attractive and if the lock-in period is reduced, this would make the product more attractive and provide more funds to the banks."

This means that if the proposal is approved on Budget Day, tax-saving fixed deposits will be the most tempting investment option on the market, maybe even better than ELSS for risk-averse investors. And as of now what fixed deposit investors can do is they can invest for the short term, and if for long term they can invest in post office saving schemes. But if returns along with tax savings are concerned, investors ready to take risk can invest in ELSS or any other well-performing mutual funds for at least 5 years to generate better returns than bank fixed deposits, and if investors who are willing to save tax through fixed deposits without taking any risk can invest in fixed deposits of small finance banks as these banks also offer tax saving deposit schemes and also are backed by DICGC insurance cover.