Have you invested your savings in fixed deposits (FDs)? If yes, start smiling because your FDs may soon be eligible for a tax rebate.
According to a report in The Economic Times, the finance ministry has agreed to consider a proposal to lower the lock-in period for bank deposits eligible for tax rebate to three years from five years. If the proposal is announced in the forthcoming Budget, it will make fixed deposits, which currently offer an annual interest rate of 9 percent or more, as attractive as the likes of equity-linked mutual funds, tax-free bonds and public provident funds, or PPP, the report said.
While mutual funds carry a certain amount of risk, debt instruments like fixed deposits are sure-shot safe havens to park money. Moreover, given that interest rates have peaked, a reduced lock-in period will help investors stay invested even when rates start to decline over the course of the year.
Moreover, a shorter lock-in period will also help banks mobilise funds at cheaper rates, and those savings could be passed on to borrowers in the form of lower rates as well.
However, some experts think the proposal violates the spirit of the Direct Tax Code, which aims at restricting tax incentives to only long-term savings.
Under current regulations, investments up to Rs 1 lakh in specified schemes are eligible for tax rebate under Section 80C of the Income Tax Act. The lock-in period varies: while it is three years for equity-linked savings schemes, it is five years for bank deposits.