SBI Tax Overhaul: The State Bank of India (SBI) has shared its pre-budget report titled ‘Prelude to Union Budget 2025-26,’ where it suggested a new tax plan. The report proposes a flat 15% tax on interest income from term deposits, no matter the maturity period.
This would be a big change from the current system, where the tax depends on the individual’s income slab and ranges from 5% to 30%. Currently, interest earned on fixed deposits is taxed annually based on income tax slabs, but the SBI recommends taxing the interest only when the deposit is withdrawn, just like how capital gains from equities are taxed.
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SBI Tax System Report
According to the SBI report, this new tax system aims to align the taxation of deposits with how stocks are taxed and help stabilize bank liquidity. It could also result in a loss of Rs 10,408 crore in government revenue each year.
The report suggests that if this new system is implemented, the savings account tax exemption should be raised from Rs 10,000 to Rs 20,000. This would benefit a large majority of savings account holders, approximately 99.65% of them.
According to Business Today, The SBI also predicts that under this new system, deposit growth could rise by 4.01%, as the simpler tax rules would encourage more people to deposit money in banks. These changes would also help banks collect low-cost funds, which can then be used for infrastructure projects.
Now, there is Rs 56.03 lakh crore in term deposits, generating Rs 3.14 lakh crore in interest annually. SBI believes that the new tax system could encourage more people to keep their money in banks, even though the returns might be lower after taxes, because it would offer more clarity compared to the current system.
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The report also highlights some trade-offs. For example, the change to savings account interest exemptions would cause a loss of Rs 1,531 crore in revenue, while the overhaul of fixed deposit taxation could cost Rs 10,408 crore annually. However, SBI argues that these losses could be offset by better deposit stability, which would lower banks’ borrowing costs for lending to sectors in need of funding.
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The report also acknowledges that many states in India are facing financial stress. For example, Karnataka spends 11% of its revenue on the Gruha Lakshmi scheme, while Madhya Pradesh spends 7% on the Ladli Behna scheme. This has made it harder to implement central tax reforms. Currently, direct taxes account for 58% of total tax collections, the highest in 14 years. Personal income tax is growing faster than corporate tax, which only grew by 4%.
Despite the revenue loss, the SBI report calls this tax proposal “pareto optimal,” meaning that it would sacrifice minimal revenue for broader economic benefits. The report stresses that making tax systems more efficient with minimal revenue loss is crucial for funding India’s infrastructure needs, which are projected to reach $6.4 trillion. The SBI also emphasizes that deposit stability is key for the resilience of the financial system.
