As Finance Minister Nirmala Sitharaman presents Union Budget 2026 on Sunday (February 1, 2026), SBI Research has outlined key tax-related expectations aimed at easing the burden on fixed deposit (FD) investors.
In its report titled “SBI Research Report – Prelude to Budget 2026-27”, the think tank has proposed changes in both tax treatment and lock-in norms for FDs.
Call for capital gains–like tax treatment on FD interest
SBI Research has suggested that interest earned on bank fixed deposits should be taxed at par with capital gains — long-term capital gains (LTCG) and short-term capital gains (STCG) — instead of being taxed at slab rates.
Currently, FD interest is added to income and taxed according to the applicable slab. While individuals earning up to Rs 12 lakh under the new tax regime are not impacted, the proposal could offer relief to those in higher tax brackets of 20% or 30%.
This becomes more relevant as banks have started cutting FD interest rates. For high-income investors, paying slab-rate tax on falling returns reduces the post-tax attractiveness of FDs. In contrast, capital gains are often taxed at lower, fixed rates and, in some cases, come with exemptions or indexation benefits.
Tax experts point out that capital gains arise from selling assets like shares, mutual funds, property, or gold, and are classified as LTCG or STCG based on holding period. If Budget 2026 allows similar tax treatment for FD interest, it could significantly reduce the tax outgo for depositors.
Proposal to cut tax-saver FD lock-in to three years
SBI Research has also recommended reducing the lock-in period for tax-saving fixed deposits from five years to three years, aligning it with Equity Linked Savings Scheme (ELSS) mutual funds.
At present, only five-year tax-saver FDs qualify for Section 80C benefits of up to Rs 1.50 lakh. Shorter-tenure FDs do not offer this benefit. In contrast, ELSS mutual funds provide the same tax deduction with a three-year lock-in.
The report suggests equalising the lock-in period for both instruments to give FD investors greater flexibility while retaining tax benefits — a move that could make traditional deposits more competitive.
