Union Budget 2026: Speculation Mounts Over Major Tax Breaks for FD Investors Amid Rising Inflation Pressures

By TCO News Desk

New Delhi, January 18, 2026 

As India gears up for the presentation of the Union Budget 2026 next month, whispers from financial corridors suggest a significant overhaul in tax policies aimed at bolstering Fixed Deposit (FD) investors. With senior citizens and retirees bearing the brunt of inflation-eroded returns, experts and industry insiders are buzzing about potential introductions like Flexi-FDs, government-backed security guarantees, and hiked exemption limits—measures that could inject fresh vitality into the Rs 50 lakh crore FD market.

The buzz originates from pre-budget consultations and analyst reports, where demands for FD-friendly reforms have gained traction. "The current tax regime on FD interest feels archaic in the face of 6-7% inflation rates," said Gaurav Singh Parmar, Associate Director at Fincorpit Consulting. "Expect the Finance Ministry to prioritize small savers with targeted relief to sustain household financial stability." 

### Flexi-FD: A Game-Changer for Young Investors? 

At the forefront of proposed innovations is the "Flexi-FD," a flexible deposit product designed to lure millennials and Gen Z away from volatile liquid funds. Under this scheme, investors could reinvest quarterly interest earnings without penalties for early withdrawals, appealing to the youth demographic with over Rs 2 lakh crore parked in short-term funds. 

Tax incentives could sweeten the deal further: No Tax Deducted at Source (TDS) on FDs up to Rs 5 lakh for first-time investors, and eligibility for deductions under Section 80C for digital FDs booked via UPI-linked apps. "This could democratize savings tools, making them as user-friendly as digital wallets," opined Siddharth Maurya, Founder and Managing Director of Vibhavangal Anukulakara Pvt. Ltd. 

### Security Guarantees to Shield Seniors 

For the elderly, a proposed government guarantee on FD interest rates—pegged at a steady 7.75% for deposits up to Rs 15 lakh—could provide a safety net against anticipated Reserve Bank of India (RBI) repo rate cuts to 6.25% in FY 2026. This measure aims to protect pensioners from eroding yields, especially as medical and living costs soar. 

Additionally, FDs aligned with Environmental, Social, and Governance (ESG) criteria might earn an extra 0.5% interest boost, channeling funds toward green projects worth up to Rs 11 lakh crore in public and private sectors. Such guarantees would mark a shift from the current deposit insurance cap of Rs 5 lakh per depositor via the Deposit Insurance and Credit Guarantee Corporation (DICGC). 

### Higher Exemptions and 'Savings Credit' Overhaul 

Echoing long-standing calls from taxpayer bodies, the budget may double exemption thresholds under the old tax regime. Savings account interest deductions (Section 80TTA) could rise from Rs 10,000 to Rs 20,000 for individuals under 60, while senior citizens' FD and savings interest relief (Section 80TTB) might jump to Rs 1 lakh from the existing Rs 50,000. 

A novel "Savings Credit" system is also on the table, offering up to 30% tax exemption on interest income up to Rs 2 lakh for FDs locked in for three years or more. Complementing this, Inflation-Indexed FDs—yielding Consumer Price Index (CPI) plus 1%—could help savers outpace rising costs. These tweaks address the pinch felt by retirees, whose FD returns are fully taxable post the Rs 50,000 cap, unlike the broader equity-linked perks. 

### Broader Context: Why Now? 

FDs remain a cornerstone of Indian savings, with over 200 million accounts, yet stagnant exemptions since 2018 have fueled discontent. Recent Economic Times analyses highlight how retired savers, reliant on 6-7% FD yields, are squeezed by taxes and inflation, prompting calls for flat deductions on interest income. Similar sentiments echo in tax advisory circles, where experts advocate for a "full revamp" to align with post-pandemic economic realities. 

While the Finance Ministry has remained tight-lipped, these proposals align with the government's Viksit Bharat vision, emphasizing inclusive growth. Confirmation awaits Finance Minister Nirmala Sitharaman's February address, but if enacted, they could unlock billions in household investments and stabilize banking liquidity. 

For now, FD investors are advised to monitor official announcements and consult tax advisors. As Maurya puts it, "These reforms aren't just relief—they're a reset for equitable wealth building."