Budget 2024: SBI Proposes To Tweak Tax On Term Deposit Interest Rates; How Common Man Will Benefit?

Since the time RBI has kept the repo rate unchanged starting from FY24 to date, there has been a significant jump in bank deposits. However, India's largest PSU bank, State Bank of India (SBI) believes tax parity on term deposits along with other asset classes needs a tweaking in the upcoming Union Budget which will be presented by Finance Minister Nirmala Sitharaman on July 23.

In its latest research report, SBI highlighted that currently "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."

In line with mutual funds or equity markets, SBI said, "We propose that the Government should tweak the 'tax on deposits interest" and make flat tax treatment across maturity ladder."

It needs to be noted that interests earned on term deposits at banks are fully taxable. This category is 'income from other sources' and is added to the total income of individuals. Accordingly, taxpayers have to pay tax rates as per their total income which is a cumulative of 'income from other sources' and 'gross annual income' that is the annual salaries of individuals.

Other sources of income can be investments like FDs, mutual funds, equities, and even gold.

The tax on FDs is in the form of tax deducted at source (TDS). TDS of 10% is levied on general category deposits if their interest on FDs is more than Rs 40,000, while in the case of senior citizens, TDS is applicable on interest above Rs 50,000.

To distribute the burden of tax payment, the tax is levied every year on the interest earned. The issuer deducts TDS when interest is earned and not when the interest is received, as per Yes Bank's website. It also pointed out that In case your total income in a financial year is not more than ₹2,50,000 (minimum taxable amount), you will be exempt from tax implications. There will be no TDS deduction on FD interest. However, to be eligible for tax exemption, you would need to submit form 15H or 15G (depending on age and income) with instructions to not deduct TDS.

That being said, SBI highlighted that household net financial savings declined to 5.3% of GDP in FY23 and is expected to be 5.4% in FY24.

It said, "If we make deposit rate attractive in line with MFs, then this could push up household financial savings and CASA."

As this amount will be in the hands of depositors, SBI said that it could unleash additional spending and thereby additional GST revenue to the Government.

Thereby, SBI added, "Increase in bank deposits will bring not only stability in core deposit base and financial system but also financial stability in household savings as the banking system is better regulated and having a superior trust as compared to other alternatives with high volatility/risk."

It further said, "Deposits are taxed on an accrual basis and other asset classes only on redemption and there is also a need to remove this treatment."

Earlier, in June 2024 policy, RBI governor Shaktikanta Das said, "The persisting gap between credit and deposit growth rates warrants a rethink by the Boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained."

RBI has kept the repo rate unchanged since April 2023, after hiking the key rate by 250 bps in FY23 in the wake of inflationary pressure.

Latest data from RBI showed that in response to the increase of 250 basis points (bps) in the policy repo rate, the weighted average lending rate (WALR) on fresh rupee loans rose by 204 bps while that on outstanding loans rose by 111 bps (May 2022 - April 2024). During the same period, the weighted average domestic term deposit rates (WADTDRs) on fresh deposits and outstanding deposits rose by 245 bps and 188 bps, respectively.

Also, RBI has proposed to revise the definition of bulk deposits as a 'Single Rupee term deposit of Rs 3 crore and above' for SCBs (excluding RRBs) and SFBs. Further, it is also proposed to define the bulk deposit limit for Local Area Banks as 'Single Rupee term deposits of Rs 1 crore and above', as applicable in the case of RRBs.

A tweak in tax rates on interest rates of term deposits by the government in Budget 2024, alongside RBI's revised definition of bulk deposits will be a big boost for common citizens' savings.