Will tax saver FD lock-in period be reduced from 5 to 3 years? See PSU banks list of suggestions

Tax-saver FD lock-in Period: Guaranteed return plans such as fixed deposits (FDs) have their own charm, as people who don't want to invest in market-linked programmes to risk their money find them a reliable option. But in an era when market-linked investment options are giving multiple time returns than the guaranteed return option and internet penetration has reached small towns and villages in India, it is very difficult for banks and financial institutions to entice consumers for options like FDs.

That was the reason many of the public sector banks increased FD interest rates to increase their credit growth.

But that attempt appears not to be sufficient as public sector banks have suggested to the new government that they decrease the tax saving FD's lock-in period from 5 to 3 years.

PSU banks hope that the three-year lock-in period of tax saving FDs may be attractive to investors.

Public sector banks are worried as last year (FY24), their credit growth was higher than their deposit growth.

While the deposit growth in banks was 12.9 per cent, the credit growth was 16.3 per cent in FY24.

As per the income tax rules, only 5-year FD falls in the category of tax exemption under Section 80C of the Income Tax Act. 

Deposits up to Rs 1.50 lakh in a 5-year FD are tax-exempt. 

But if one makes an FD of a lesser duration, they can't get tax relaxation on deposits.    

Are banks feeling threatened?

It is possibly due to new-age investors preferring stock markets, mutual funds, and tax saving equity linked saving schemes (ELSS) to tax saving FDs.

In FY23, compared to FY21, the investment of Indian investors in the stock market and the bond market increased from 0.5 per cent to 0.8 per cent, while the deposits in banks decreased from 6.2 per cent to 4 per cent.

According to AMFI, i.e., the Association of Mutual Funds, the AUM (assets under management) of MF companies increased from Rs 24.79 lakh crores in April 2019 to Rs 52.76 lakh crores by April 20, 2024.

Increasing credit growth and decreasing deposit growth is a matter of concern for banks because they have to raise money from the market, due to which loans are also expensive.

With increasing loans and demand for infrastructure, the credit deposit ratio is a cause for concern for banks.

According to the data, the CD ratio (credit deposit ratio) increased from 75.8 per cent to 80 per cent by September 2023 as compared to the year 2022-2023.