Short Description: Ahead of India’s budget, SBI’s chief calls for tax parity between bank deposits and mutual funds, highlighting a major shift in household savings.
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Ahead of India’s Union Budget, a significant call for tax reform is echoing through the nation’s banking sector. State Bank of India (SBI) Chairman C.S. Setty has urged the government to create a level playing field for financial products, specifically addressing the tax disadvantage faced by traditional fixed deposits (FDs). This push comes as bank deposits lag credit growth, creating a liquidity strain for lenders. The core issue is a structural shift in household savings, with retail investors increasingly funneling money into equity mutual funds for better post-tax returns, leaving traditional savings accounts behind.
The data underscores a dramatic transformation. The ratio of mutual fund assets under management (AUM) to bank deposits has nearly tripled from 12.6% in 2015 to over 33.5% in 2025. While bank deposits have grown threefold in the past decade, mutual fund AUM has skyrocketed more than seven times. Industry leaders, including the Indian Banks’ Association, have long argued that the current tax structure—where FD interest is fully taxable—is outdated. They warn that continued deposit outflows into capital markets could pose systemic risks to the banking system, which is the backbone of the economy.
The consensus among bankers is clear: to ensure stable funding for economic growth, there needs to be a re-evaluation of how savings instruments are taxed. Aligning the tax treatment on deposit interest with long-term capital gains from equities could incentivize savers to return to the safety of bank deposits. As SBI Research noted, such a move would boost household savings in the formal banking channel, ensuring banks have the necessary funds to meet robust credit demand from a growing economy without compromising financial stability.
Short Summary: In summary, India’s top bankers are advocating for tax parity to halt the shift from bank deposits to mutual funds. With deposit growth struggling to keep pace with lending, reforming the tax treatment on fixed deposit interest is seen as crucial to attract household savings back to banks, ensuring financial system stability and supporting continued economic credit expansion.
