Why is Indexation benefit not available for Bank FDs

Bank (Resident) FDs do not get indexation benefit but If invested in debt mutual fund, the taxation is as follows:-

In debt funds, short term capital gains (held for less than 36 months) are taxed as per the income tax slab of the investor and long term capital gains (held for more than 36 months) are taxed at 20% after allowing indexation benefits. Therefore, in debt fund vs fixed deposit comparison, debt funds scores high.

Is there any rationale for not giving this benefit to (Resident) Bank FDs. I do understand that the customer can provide 15G form to avoid TDS but what is the reasoning that Bank FDs should be excluded from Indexation when in fact, I am assuming, that majority of the population invest in Bank FDs, which in turn is channelled to Corporates, Retail and other businesses.

Or

Is it to incentivise customer to invest in Corporate bond because of its relatively higher risk than Bank FD.

With regard to equity and real estate, I understand the logic of indexation as the gains are Capital in nature. In case of debt mutual fund or corporate bond, the investor still gets only a rate of return, just like bank FD.

What wrong did FDs do to be treated this way.

Simple logic is indexation is offered on capital gains, not on interest or dividend earned.

On FD you earn interest, so no indexation.
In Mutual fund if it is growth option you earn capital gain, so you get indexation. However, if you invest in dividend payment option - you do not get indexation on dividend earned.
Same goes with direct stocks - indexation on capital gains, not on dividend earned.

Even if you invest directly in corporate bonds or for that matter G-secs you DO NOT get benefit for indexation.

No Mutual fund cannot offer you a rate of return. It is legally not permissible. Also, debt MF can make capital loss, so nothing is guaranteed in MF.

So if you want indexation, invest in assets which generate capital gains. If you are earning interest, regardless of instrument, you will not get indexation benefit.

3 Likes

Thank you. Understood. As always very clear and concise.