Will Budget 2026 Finally Ease the Tax Burden on FD Interest and Reward India’s Small Savers?
As the countdown to Union Budget 2026 begins, one issue is steadily moving to the centre of middle-class conversations: tax relief on savings and fixed deposit (FD) interest. For millions of Indians — especially senior citizens — interest income is not a luxury but a financial lifeline. Yet the tax benefits available on such income have remained frozen for years, even as inflation, healthcare costs and daily expenses continue to rise.
Tax professionals now say the gap between policy and reality is widening, and expectations are growing that Finance Minister Nirmala Sitharaman may use Budget 2026 to offer targeted relief to savers.
Why Tax Relief on Interest Income Is Back in the Spotlight
For conservative investors, bank deposits remain the cornerstone of financial planning. Retirees, pensioners and risk-averse families depend on interest income to manage monthly expenses, medical bills and emergency needs.
However, current deductions under the old tax regime are limited:
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Section 80TTA allows a deduction of up to ₹10,000 on savings account interest (only for individuals below 60)
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Section 80TTB allows senior citizens to claim up to ₹50,000 on interest income from savings accounts, FDs and recurring deposits
Experts argue these limits were meaningful when introduced, but have lost relevance in today’s high-cost environment.
“These limits were meaningful when they were introduced, but they have lost relevance over time,” said Ankit Sanghavi, Secretary, The Chamber of Tax Consultants.
With inflation hovering around 5–6% and deposit rates rising, post-tax returns for savers have come under sustained pressure.
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Deductions That No Longer Match Today’s Cost of Living
Tax experts agree that the problem is not the structure of deductions but the failure to update them with economic realities. Over time, inflation has eroded the real value of these benefits, leaving taxpayers with relief that feels largely symbolic.
According to SR Patnaik, Partner (Head – Taxation) at Cyril Amarchand Mangaldas, the interest income deduction caps “have not been revised as per the inflationary trends in our economy” and no longer align with today’s living costs.
There is now a growing expectation within tax and policy circles that Budget 2026 could:
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Raise the 80TTA limit from ₹10,000 to ₹20,000
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Increase the 80TTB limit from ₹50,000 to ₹1 lakh for senior citizens
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Consider some form of deduction for FD interest for non-senior citizens
Such changes would offer meaningful relief without radically altering the tax framework.
Fixed Deposits and the Middle-Class Disconnect in Tax Policy
One of the biggest concerns raised by experts is the treatment of FD interest for younger taxpayers. While savings account interest enjoys limited relief, FD interest is fully taxable, even though FDs remain the most preferred savings option for middle-class households.
“For most middle-class families, the bulk of interest income comes from fixed deposits, not savings accounts,” Sanghavi pointed out.
This creates a clear disconnect between tax rules and real household behaviour. A modest, flat deduction on FD interest — limited to bank and post office deposits — could provide relief while keeping the system simple and compliant.
However, experts caution that any such move must balance relief for savers with the government’s broader objective of encouraging market-linked investments.
New Tax Regime Faces Questions on Fairness for Retirees
While the new tax regime has gained popularity due to lower slab rates and simplified compliance, it offers almost no targeted relief for retirees and conservative savers.
Tax experts believe that incorporating a small standard deduction for interest income within the new regime could significantly improve its fairness.
“Interest income is often seen as a necessity for households rather than a tax-saving strategy,” said Ritika Nayyar, Partner at Singhania & Co.
From a legal standpoint, Tushar Kumar, Advocate, Supreme Court, argues that any relief should be structurally built into the regime rather than scattered across multiple sections. A calibrated enhancement, he noted, could protect purchasing power without compromising fiscal discipline.
Here’s What Happened Today and Why Traders Reacted
Markets have already begun pricing in mild expectations of tax relief ahead of Budget 2026, particularly in sectors linked to household savings.
Today’s market behaviour reflected cautious optimism:
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Banking stocks traded firm on hopes that higher FD attractiveness could improve deposit inflows
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Select PSU banks saw increased investor interest due to strong retail deposit franchises
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Insurance stocks remained steady, as higher savings retention could support long-term product demand
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Broader indices stayed rangebound, indicating expectations are still evolving rather than fully priced in
Traders appear to be positioning for a sentiment-driven theme, rather than a confirmed policy outcome. Any official hint from the finance ministry in the coming weeks could accelerate sector-specific moves.
What This Means for Traders in the Coming Sessions
Short-term traders are likely to track:
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Budget-related commentary on personal taxation
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Any leaks or reports from pre-Budget consultations
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Movement in banking and financial stocks
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Retail participation trends in savings-linked instruments
Stocks linked to retail finance, deposits and household savings could remain headline-sensitive over the next few weeks.
How Budget 2026 Tax Relief Could Affect Investor Portfolios
If deduction limits are revised, the biggest beneficiaries would be:
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Senior citizens dependent on interest income
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Middle-class savers with large FD exposure
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Conservative investors prioritising capital protection
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Families managing healthcare and retirement expenses
“This can be ensured through appropriate caps, aggregation of interest income across institutions, and income-linked thresholds,” said CA Dinesh K. Jain, Managing Partner, Dinesh Aarjav & Associates. He added that a balanced approach would “protect revenue, prevent misuse, and bring India’s interest-income taxation framework closer to global best practices while remaining sensitive to domestic realities.”
For long-term investors, higher post-tax returns on deposits could improve financial stability and encourage better asset allocation decisions.
Relief Is No Longer a Luxury, but a Policy Necessity
As India’s population ages and household financial stress rises, the case for revisiting interest income taxation is growing stronger. Budget 2026 now carries not just fiscal expectations, but also emotional weight for millions of savers.
Whether the government chooses to act this year remains uncertain. But one thing is clear: tax relief on FD interest is no longer just a demand — it is becoming a policy imperative.
