New Delhi [India], August 19 : The State Bank of India (SBI) in its latest report has asked for tax reforms after concerns were flagged over the recent decline in bank deposits. The report says tax Reforms for Deposits can accentuate the banking system's stability and resilience to the next level.
SBI attributed the fall in deposits to the varied rates of return offered by different investment options for similar time frames and different tax rates on returns on deposits.
The SBI report said that "Tax treatment of bank and non-bank channels are non-uniform, even as bank deposits have a wider and denser pass-through effect across the populace sensitivity of Deposits on Tax is as much as 7 per cent"
The report noted that a bank deposit of Rs 10 lac in a Savings Bank (SB) account at an investment return of 3 per cent would generate Rs 30,000 in returns and after accounting for taxes and exemptions, the net return would be Rs 16,000.
The report adds that the net returns vary significantly if deposits are made in different instruments like term deposits, short and long-term investments in debt funds, liquid funds or bonds. The tax rates on these deposits also favour saving banks or term deposits.
The report illustrates a term deposit of up to one year with the same principal amount of Rs 10 lac at a yield of 6.25 per cent would result in a net return of Rs 50,000 after taxes. But for term deposits exceeding one year the interest rate is higher and with an interest rate of 7.25 per cent, the gross return would be Rs 72,500. After taxes, the net return would be Rs 58,000.
The data highlights that similar type of investments for the same period generates significantly different returns because of different tax treatment by the government.
Similar variations are observed in other investment plans as well. For instance, investments in equity and mutual funds with a 2 per cent dividend income of Rs 10,00,000 generate Rs 20,000, which after taxes the net return is Rs 16,000.
However, Short-term investments of less than one year in equity and mutual funds, offering an 11 per cent return generate Rs 1,10,000, with a net return of Rs 88,000 after taxes.
This investment if made in Long-term investments of more than one year the return increases to 15% on Rs 10,00,000 and generates Rs 1,50,000 annually. With a lower tax bracket of 12.5 per cent tax on long-term investments and applicable exemptions, the net return is Rs 1,43,750.
These variations in returns across different deposits and investment options highlight the complexity and thus investors are choosing the higher return options over the bank deposits which in turn poses a threat to the deposit growth in the banking sector.
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