SBI Pushes for Tax Parity on Bank FDs to Align with Mutual Funds & Equity Markets in Upcoming Budget

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State Bank of India (SBI) has urged the government to bring about income tax parity on bank fixed deposits (FDs) in the upcoming Budget 2024. The largest lender in the country has highlighted the disparity between bank credit growth, which outpaced deposit increases by Rs 2 lakh crore in the last fiscal year 2023-24. This call for tax parity comes at a time when the taxation for short-term capital gains on equity and mutual funds stands at a flat 15%, while long-term gains enjoy a moderate 10% rate with exemptions up to Rs 1 lakh, making these investments more attractive to investors.

SBI’s proposal aims to align the tax treatment of bank deposit interests with that of mutual funds and equity markets by implementing a flat tax rate across different maturity periods. Soumya Kanti Ghosh, the Group Chief Economic Adviser at SBI, emphasized the need for this change in his report ‘Prelude to Union Budget 2024-25’. He pointed out that the current taxation framework favors alternate investments due to the ability to set-off losses against profits and carry over losses for up to eight years.

The decline in household net financial savings to 5.3% of GDP in FY23, with expectations of a further decrease to 5.4% in FY24, underscores the importance of making deposit rates more appealing. By enhancing the attractiveness of bank deposits, financial savings in households and current account savings accounts (CASA) could be significantly boosted. This move could potentially lead to increased consumer spending, resulting in additional GST revenue for the government.

Furthermore, Ghosh emphasized that an increase in bank deposits would not only stabilize the core deposit base and financial system but also enhance financial stability in household savings. The trust and regulation inherent in the banking system make it a preferred investment option compared to other volatile and risky alternatives. He also called for a revision in the tax treatment of deposits, highlighting the need to eliminate the disparity between the taxation of bank deposits on an accrual basis versus other asset classes taxed only upon redemption.

In summary, SBI’s push for tax parity on bank FDs reflects the need to create a level playing field for different investment avenues in the upcoming budget. Aligning the tax treatment of bank deposits with mutual funds and equity markets could not only boost household savings but also ensure financial stability and regulate the financial system.