SBI bats for tax parity of FDs with mutual funds, stocks

State Bank of India in a research report urged the government to bring tax on interests earned from fixed deposits on par with other asset classes such as mutual funds and stocks.

The present dispensation for equity and mutual fund holdings stipulates Short Term Capital Gains tax at a flat rate of 15% while Long-Term Capital Gains are taxed at a moderate 10%, with exemption allowed till income of LTCG up to one lakh during a given financial year, says Soumya Kanti Ghosh, Group chief economic adviser at State Bank of India. “The setting-off of loss against profits and carrying over the loss up to next eight years make the opportunity cost of such alternate investments quite lucrative,” says Ghosh.

In line with mutual funds and equity markets, SBI has proposed that the government should tweak the tax on deposit interest and make flat tax treatment across the maturity ladder.

The suggestion by Ghosh comes at a time when household net financial savings have declined to 5.3% of GDP in FY23 and is expected to be 5.4% in FY24. “If we make deposits rate attractive in line with MFs, then this could push up household financial savings and CASA,” says Ghosh.

As this amount will be in the hand of depositors, it could unleash an additional spending and thereby additional GST revenue to the Government, he argues.

Increase in bank deposits will bring not only stability in core deposit base and financial system but also financial stability in household savings as banking system is better regulated and having a superior trust as compared to other alternatives with high volatility and risk, says Ghosh.

Ghosh further says that deposits are taxed on accrual basis and other asset classes only on redemption and there is also a need to remove this treatment. “Parity on taxation front for bank deposits (both Demand and Time) vis-à-vis other investment avenues is an immediate need given the shifting preference of select cohorts of investors to alternate asset classes whose returns have been trumping bank deposits,” he says adding that the impact on revenue foregone for government of any such move would not be significant.

Interest income from fixed deposits is taxable, based on the income tax slab one falls into. There is TDS (Tax Deducted at Source) on FD interest along with any applicable surcharge or cess. For example, if a person's total annual income is above ₹10 lakh, then he/she falls into a 30% tax slab. If the interest earned on FD is ₹1 lakh, then he/she will pay ₹31,200 as tax (30% income tax plus 4% cess on tax paid).