Budget 2022 should reduce 5-year lock-in period of tax-saving bank FDs to make them more attractive

To make the fixed deposit (FD) a more favourable investment option, the Indian Banks' Association (IBA) has made a case for reducing the lock-in period for FDs to be eligible for tax breaks from the current five years to three.

"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," the IBA has said in a proposal submitted to the finance ministry, according to a Times of India news report.

Bank FD investors have been a disgruntled lot thanks to banks relentlessly cutting interest rates to decadal lows over the last couple of years. Added to this, the government has kept interest rates on small saving schemes like the PPF, term deposits, Senior Citizens Saving Scheme, National Savings Certificate etc unchanged for several quarters now.


And to add further salt to their wounds, the stock market boom of the last few years has prompted several investors to shun bank deposits and move to mutual funds or direct investment in shares. As a result, apart from some senior citizens in the higher income brackets, most other depositors are shunning five-year FDs, stated the ToI report.

In fact, bank FDs over five years were made eligible for tax breaks under section 80C much later as part of the annual benefit of Rs 1.5 lakh available for specified investments. Even with the benefit, it is less attractive than, say, PPF as the interest earned on these FDs is taxable.