Budget 2024: New Tax Rules Could Make Bank FDs the Go-To Investment, Say Experts

MUMBAI: The recent increase in taxes on short-term and long-term equity gains and the removal of indexation benefits for property sales may make fixed deposits (FDs) more attractive to savers. This change could lead to more people choosing traditional banking options, which is good news for banks struggling to match their deposits with their growing loans.

Sanjay Mudaliar

Sanjay Mudaliar, the executive director at Bank of Baroda, believes this could result in more people opting for term deposits. He said, “Even if it doesn’t lead to new deposits, it might stop people from withdrawing their savings. Increased government spending is also positive for banks because it could lead to more money being deposited in banks. Overall, the budget has been good for banks because it hasn’t made the deposit problem worse. Banks will still need to work efficiently to take full advantage of these changes.”

The Budget Speech

In her budget speech, finance minister Nirmala Sitharaman announced an increase in the short-term capital gains tax on listed equity instruments from 15% to 20%. The tax on long-term capital gains for listed equity instruments and certain other assets will rise from 10% to 12.5%. Additionally, the removal of the indexation benefit means that inflation adjustments can no longer be made, increasing the overall tax burden.

Shivaji Thapliyal, head of research at Yes Securities, said the government’s move is indirectly good for banks but not so good for physical assets and equity investments. He explained, “These steps are positive for banks because they might lead to more people putting their savings into bank deposits instead of real estate, gold, stocks, and mutual funds. However, the impact won’t be huge.”

The Worst Deposit Shortage

This change comes at a time when banks are facing the worst deposit shortage in almost 20 years. As of the end of June, bank deposits were growing at 11.1% year-on-year, much slower than the credit growth of 17.4%, according to RBI data.

Bankers don’t expect a significant change immediately but hope that savers’ attitudes will shift over time. An executive director of a large public sector bank commented, “Interest on deposits is still taxed at the highest rate, and interest on savings accounts over ₹10,000 is also taxed. But in the long run, we hope that people will choose the safety of fixed deposits now that the tax advantages of other investments have been reduced.”