Bank deposit taxation needs immediate parity with competing avenues: SBI’s eco research

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Parity on the 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, according to State Bank of India’s economic research department (ERD).

Basis, its analysis, the ERD opined that the impact on revenue foregone for the Government of any such move would not be significant.

“The present dispensation for Equity/Mutual Fund holdings stipulate Short Term Capital Gains tax at a flat rate of 15 per cent while the Long-Term Capital Gains (LTCG) are taxed at a moderate 10 per cent, with exemption allowed till income of LTCG up to one lakh during a given Financial Year (FY),” said Soumya Kanti Ghosh, Group Economic Adviser, SBI, in report on prelude to Union Budget 2024-25.

Also, 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, he added.

In line with MF/equity markets, the ERD suggested that the Government should tweak the ‘tax on deposits interest” and make flat tax treatment across maturity ladder

Referring to household net financial savings declining to 5.3 per cent of GDP in FY23 and is expected to be 5.4 per cent in FY24, ERD said if deposit rates are made attractive in line with MFs, then this could push up household financial savings and CASA (current account, savings account).

As this amount will be in the hand of depositors, it could unleash an additional spending and thereby additional GST (Goods & Service Tax) revenue to the Government

Ghosh observed that increase in bank deposits will 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/risk

Noting that deposits are taxed on accrual basis and other asset classes only on redemption, he said there is also a need to remove this disparity.