Call For Tax Parity On Bank Deposits And Investment Avenues

State Bank of India's economic research department (ERD) has called for tax parity between bank deposits and other investment avenues, citing a shift in investor preferences towards assets with higher returns. "Parity on the taxation front for bank deposits (both Demand and Time) vis-à-vis other investment avenues is an immediate need," said the ERD.

According to the ERD's analysis, the revenue impact of such a change for the Government would be minimal. Currently, short-term capital gains on equity and mutual fund holdings are taxed at 15 per cent, while long-term capital gains are taxed at 10 per cent, with exemptions for gains up to one lakh rupees per financial year, noted Soumya Kanti Ghosh, Group Economic Adviser, SBI, in a report ahead of the Union Budget 2024-25.

Ghosh highlighted that the ability to set off losses against profits and carry over losses for up to eight years makes alternate investments appealing. The ERD suggested that the Government should standardise the tax treatment on deposit interest across different maturities, similar to mutual funds and equity markets.

With household net financial savings declining to 5.3 per cent of GDP in FY23 and expected to be 5.4 per cent in FY24, ERD believes that making deposit rates more attractive could boost household financial savings and current and savings accounts. This could lead to increased spending and higher GST revenue for the Government.

Ghosh emphasised that higher bank deposits would enhance the stability of the core deposit base and the financial system, while also ensuring financial stability in household savings, as banks are better regulated and more trusted than other high-volatility investments.

He pointed out the disparity in taxation, with deposits taxed on an accrual basis while other asset classes are taxed only on redemption and called for its removal.