In its Budget note for Nirmala Sitharaman, SBI wants a fair chance for bank deposits

In its latest report, State Bank of India’s economic research department has underscored the urgent need for tax parity for bank deposits, compared to other investment avenues. 

"The present dispensation for equity/MF holdings stipulate Short Term Capital Gains tax at a flat rate of 15% while the Long-Term Capital Gains are taxed at a moderate 10%, with exemption allowed till income of LTCG up to one lakh during a given FY…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," the lender said in the note. 

According to the lender's analysis, the government's potential revenue loss from such a tax adjustment would be minimal.

In the report leading up to the Union Budget 2024-25, the department suggests the government should align the tax treatment of deposit interest with that of mutual funds and equity markets, applying a flat tax rate across different maturities.

The department also pointed to a decline in household net financial savings, which dropped to 5.3% of GDP in FY23 and is expected to be 5.4% in FY24. Enhancing the attractiveness of deposit rates could boost household financial savings and CASA (current account, savings account). 

This, in turn, would put more money in depositors' hands, potentially increasing consumer spending and generating additional GST revenue for the government.

Ghosh further notes 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 banking system is more regulated and trusted compared to other volatile and risky investment alternatives.

Addressing the disparity between the taxation of bank deposits, which are taxed on an accrual basis, and other asset classes, taxed only upon redemption, Ghosh calls for a revision to eliminate this inconsistency.