Interest on fixed deposits like LTCG and STCG, lock-in period of 3 years like ELSS for 80C advantage, what SBI Research suggests for Budget 2026
Jan 28, 2026
Synopsis
SBI Research proposes aligning fixed deposit interest tax with capital gains. It also suggests shortening the lock-in for tax-saving FDs to three years, matching ELSS mutual funds. This aims to offer tax Section 80C tax benefits also to those investors who invest in 3-year FDs. As Finance Minister Nirmala Sitharaman presents Budget 2026 on Sunday (February 1, 2026), many investors expect changes related to FD interest.
Investors get Section 80C tax benefits up to Rs 1.50 lakh in a financial year on deposits in a tax-saver FD, where the lock-in period is 5 years. However, if the same investor invests in ELSS mutual funds, where the lock-in period is three years, they get tax benefits on deposits under Section 80C.
SBI Research, in its Budget 2026 expectation report, has suggested the government to announce tax treatment for interest on fixed deposits (FDs) at par with LTCG (long-term capital gains) and STCG (short-term capital gains). The SBI Research report titled SBI Research Report- Prelude to Budget 2026-27- also suggests Finance Minister Nirmala Sitharaman reduce the lock-in period for tax-saving fixed deposit (FD) schemes from 5 years to 3 years in line with Equity Linked Savings Scheme (ELSS) mutual funds. As FM Sitharaman presents Budget 2026 on Sunday (February 1, 2026), let's discuss in detail SBI Research's expectations from her.
Tax treatment for interest on deposits to be at par with LTCG and STCG
SBI Research in its report says that it suggests Finance Minister Sitharaman to treat the tax on deposits as being at par with LTCG and STCG.
Fixed deposits are taxed at slab rates. As individual taxpayers pay zero income tax on income up to Rs 12 lakh in the new income tax regime so they are not affected by income tax at slab rate.
For an FD investor whose taxable income is higher but still falls in a low tax slab, paying tax on FD interest at slab rates may not be very challenging.
However, someone who falls in a higher tax bracket, say 20% or 30%, paying tax on FD interest at slab rates can be tough, specially in a scenario where leading banks are slashing interest rates on their FDs.
On the other hand, capital gains can be taxed at a fixed rate or slab rate, and in certain cases, may also provide the benefit of indexation. Abishek Soni, CEO and founder, Tax2Win, explains capital gains are the profits made when you sell assets like shares, mutual funds, property, gold, etc. “Capital gains are of two types- STCG and LTCG- based on the holding period of the asset,” says Soni.
In case budget 2026 gives relief to investors on their FD investments by allowing STCG and LTCG exemptions and lower tax rate it would help them in bringing down their tax outgo.
What are the capital gains (LTCG, STCG) tax rates for different assets and holding periods?
Capital gains tax rate table (As per CA Suresh Surana)
|
Types of asset |
Holding period for long term capital asset |
Long term capital gains (LTCG) |
Short term capital gains (STCG) |
|
Listed equity shares |
12 months |
Gains up to Rs 1.25 lakh exempt; balance taxable at 12.5% without indexation |
20%** |
|
Listed equity mutual funds |
12 months |
Gains up to Rs 1.25 lakh exempt; balance taxable at 12.5% without indexation |
20%*** |
|
Listed tax-free bonds |
12 months |
12.5%, indexation benefit not available (interest from notified tax-free bonds is exempt from tax) |
Tax at slab rates |
|
Listed debentures |
12 months |
12.5%, indexation benefit not available (interest from notified tax-free bonds is exempt from tax) |
Tax at slab rates |
|
Debt mutual funds (more than 65% in debt and money market instruments) |
24 months |
If acquired prior to April 1, 2023: 12.5% without indexation |
If acquired prior to April 1, 2023: 12.5% without indexation |
|
Acquired on or after April 1, 2023: Tax at applicable slab rates, indexation benefit not available |
Acquired on or after April 1, 2023: Tax at applicable slab rates, indexation benefit not available |
||
|
Unlisted shares |
24 months |
12.5% without indexation |
Tax at slab rates |
|
Unlisted debentures and unlisted bonds |
24 months |
Tax at applicable slab rates, indexation benefit not available |
Tax at applicable slab rates, indexation benefit not available |
|
Immovable property |
24 months |
Acquired before July 23, 2024: 20% with indexation or 12.5% without indexation |
Tax at slab rates |
|
Acquired on or after July 23, 2024: 12.5% without indexation |
3-year lock-in period for FD like ELSS for 80C advantage
SBI Research also suggests the government reduce the lock-in period from 5 years to 3 on FD investments to extend Section 80C tax benefits to taxpayers with a 3-year tenure FD. The report says the FD's lock-in period for tax benefits should be the same as ELSS mutual funds that has a three-year lock-in period.
Investors get Section 80C tax benefits up to Rs 1.50 lakh in a financial year on deposits in a tax-saver FD, where the lock-in period is 5 years. However, if they invest in an FD of a lower duration, such as 3 years, they don't get such tax benefits.
However, if the same investor invests in ELSS mutual funds, where the lock-in period is three years, they get tax benefits on deposits under Section 80C.
The SBI Research report suggest equalling the lock-in period for FD and ELSS.
[The Economic Times]
