In a striking revelation, State Bank of India’s Economic Research Department (ERD) has underscored the urgent necessity for taxation parity on bank deposits, encompassing both demand and time deposits, to align with other investment avenues. This call to action is driven by the noticeable shift of investors towards alternate asset classes that are currently yielding higher returns.
The ERD’s comprehensive analysis indicates that the fiscal impact of such a move on government revenue would be marginal. According to Soumya Kanti Ghosh, Group Economic Adviser at SBI, the existing tax regime for equity and mutual fund holdings imposes a 15% tax on short-term capital gains and a 10% tax on long-term capital gains, with the latter being exempt up to one lakh rupees annually. This preferential tax treatment, combined with the ability to offset losses against profits and carry them forward for up to eight years, renders these investment options exceedingly attractive.
To rectify this imbalance, the ERD proposes that the government standardize the taxation of deposit interest across different maturities, akin to the treatment of mutual funds and equities. This recommendation comes against the backdrop of declining household net financial savings, which dropped to 5.3% of GDP in FY23 and are projected to slightly recover to 5.4% in FY24. Enhancing the attractiveness of deposit rates in line with mutual funds could significantly bolster household financial savings and increase the flow of funds into current and savings accounts (CASA).
Ghosh further highlighted that an increase in bank deposits would not only stabilize the core deposit base and the financial system but also enhance financial stability in household savings. This is particularly pertinent as the banking system is better regulated and inherently more trustworthy compared to other volatile and risky investment alternatives.
Moreover, the current disparity where deposits are taxed on an accrual basis while other asset classes are taxed only upon redemption needs to be addressed. Aligning the taxation policy for bank deposits with that of other investment avenues would not only level the playing field but also encourage additional spending, thereby generating increased Goods and Services Tax (GST) revenue for the government.
In conclusion, achieving taxation parity for bank deposits is imperative for fostering a balanced investment landscape, promoting financial stability, and enhancing government revenue through augmented household savings and spending.
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