The State Bank of India has suggested a relook at the taxation of interest on bank deposits as investors are earning negative returns "for a considerable period of time".
In a research report published in September, economists at the country's largest bank said if not for all depositors, the taxation review should be done for at least senior citizens who depend on the interest for their daily needs.
"We believe that it is now the opportune time to revisit the taxation of interest on bank deposits, or at least increasing the threshold of exemption for senior citizens," the report said. "The RBI can also relook at the regulation that does not allow interest rates of bank to be determined as per age-wise demographics," it added.
At present, the fixed deposit returns being offered by most banks is lower than the rate of inflation. As a result, investors are getting negative real rate of returns. On top of that, FD returns are taxed as per the investor's slab rate, leading to further depletion of returns.
‘Investors opting for floater funds’
SBI said the low returns in term deposits is pushing conservative investors towards floater funds. "Investors have been increasingly investing in floating rate mutual funds anticipating increase in interest rate. Such instruments can provide support to the fixed income portfolio in a rising interest rate scenario, thereby leading to its increased demand," the report said, adding that floater funds have received the second largest amount amongst the all debt mutual funds in the last 3 months.
It also said that the low returns from bank deposits is leading to diversion of household savings towards the stock markets. “This (negative returns on deposits) implies that the current bull run in financial markets is possibly a break from the past as households may have got into the bandwagon of self-fulfilling prophecy of a decent return on their investment,” the report said.
‘Rs 47.9 lakh crore lying in 172 crore savings account’
According to the report, there are 172 crore savings account registered with Indian banks. These accounts hold Rs 47.9 lakh crore deposits.
