The Union Budget this year will be presented, like before, on 1 February. That’s a little more than a fortnight away. This time, a Sunday budget means many weekend plans will have to be rejigged. Speaking of which, a rejig is also what the humble fixed deposit deserves on 1 February.

It gets a lot of bad press for its modest returns not beating inflation. But the good-old fixed deposit remains the go-to investment for millions of Indians. Never mind the surge in equity investing in the country since the pandemic. Never mind the fall in deposit interest rates over the past year or so. Fixed deposits are simple to understand and safe for the most part. Many, especially senior citizens, value that. 

You get what you see in fixed deposits. Or do you?  

Actually, you don’t. Taxes often take away a good part of the fixed deposit’s interest, and so the returns you get post-tax often lag inflation. Trouble is, this tax trouble is accentuated by laws that give fixed deposits a raw deal, compared with their rival—debt funds.

In 2023, with shock-and-awe amendments just a couple of days before that year’s Budget was to get Parliament’s nod, the government largely leveled the playing field between fixed deposits and debt mutual funds. This, it did,  by a wholesale scrapping of the tax concessions that debt funds enjoyed. So, since then, gains on debt funds are taxed at investors’ slab rates, similar to interest on fixed deposits. 

Yet, a crucial difference remains. Gains on mutual funds, including debt funds, are taxed only at redemption. On the other hand, interest on fixed deposit instruments—whether issued by banks, companies, or the post office—are taxed every year, whether or not you receive the interest every year. This makes a big difference and is among the key reasons why many financial planners don’t recommend fixed deposits—as mentioned in The Ken’s story “Where to invest Rs 1 lakh, Rs 10 lakh, Rs 1 crore,” earlier this month.

Tax deferral can improve the returns and the attractiveness of fixed deposits considerably by allowing compounding to work its magic fully. Tax deferral essentially means that you pay taxes on your interest income not immediately, but on a future date.