'15% flat tax on all FDs':  SBI suggests bold deposit tax revamp in Budget 2025 report

The State Bank of India (SBI), in its pre-budget report 'Prelude to Union Budget 2025-26', has recommended a flat 15% tax on interest income from term deposits across all maturities, a shift from the current slab-based system.

The proposal aims to align deposit taxation with equities and stabilize bank liquidity but risks an annual revenue loss of Rs 10,408 crore for the government.

Currently, interest on fixed deposits (FDs) is taxed annually at individual income slab rates (5–30%), with exemptions up to Rs 10,000 for savings accounts. The SBI report advocates taxing FD interest only at redemption, mirroring capital gains treatment for equities, while raising the savings account tax exemption threshold to Rs 20,000. Combined, these changes would cost Rs 11,965 crore annually – 0.14% of India’s projected FY26 GDP of Rs 357.2 lakh crore.

Key recommendations:

Flat 15% tax on all FDs: Replace tenure-based tax brackets with uniform 15% levy, applied when interest is withdrawn.

Savings account threshold hike: Raise tax-free interest cap from Rs 10,000 to Rs 20,000, benefiting 99.65% of savings accounts.

Surge deposits: Project 4.01% deposit growth due to simplified taxation, expanding banks’ low-cost funds for infrastructure lending.

The report argues the current system disincentivizes deposits, with Rs 56.03 lakh crore in term deposits yielding Rs 3.14 lakh crore annual interest. Under the new regime, banks could retain deposits despite lower post-tax returns by offering “clarity and parity with market instruments.”

Fiscal trade-offs:

Revenue loss: Rs 1,531 crore from savings account changes; Rs 10,408 crore from FD overhaul.

Offsetting gains: Improved deposit stability (core CASA ratio) and reduced banks’ borrowing costs for priority-sector lending.

The proposals come amid rising state fiscal stress. Karnataka (11% revenue spent on Gruha Lakshmi scheme) and Madhya Pradesh (7% on Ladli Behna) face widening deficits, complicating central tax reforms. Direct taxes now account for 58% of collections – a 14-year high – as corporate tax growth (4%) lags personal income tax (7%).

SBI terms the plan “pareto optimal,” sacrificing minimal revenue for broader economic efficiency. “Rationalizing direct taxes with least revenue loss is critical to fund India’s $6.4 trillion infrastructure needs,” the report states, noting deposit stability is “non-negotiable” for financial system resilience.