Investors who park their funds in fixed deposits (FDs) are a disappointed lot. The provisions in the recent Union Budget have caused them some grief.

Whereas on one hand the government has brought down the tax limit on interest income, on the other hand, it has also reduced the tax exemption limit by 25%.

The interest on fixed deposit, which was taxed @10% on amount exceeding Rs 10,000, will now be taxed at a similar rate on amount exceeding Rs 2,500. In other words, the banks will now deduct TDS (tax deducted at source) on interest amounts exceeding Rs 2,500 instead of Rs 10,000 earlier. This will make investors split their deposits into smaller amounts not exceeding Rs 2,500 so as to escape the TDS net. Secondly, tax exemption limit under section 80L on interest on fixed deposit has been reduced from Rs 12,000 to Rs 9,000. This makes investment in FDs unattractive beyond a point.

The measures outlined above are likely to turn investors away from FDs. FDs have lost their tax efficiency and with a lower interest rate regime on the horizon, even returns are going to take a hit. Investors will be forced to look at more attractive investment avenues like bonds and income (debt) funds for higher returns on investments and tax efficiency.

Add Comments