SBI Chairman Advocates for Tax Parity Between Bank Deposits and Mutual Funds
On the eve of the Union Budget presentation, State Bank of India chairman CS Setty has emphasized the need for a level playing field in tax treatment across all financial products, particularly highlighting fixed deposits. This call comes amid a concerning trend where bank deposit growth continues to trail behind credit expansion, while retail savings increasingly flow into mutual funds.
Banking Sector's Concerns Over Deposit Growth
When questioned about his budget expectations, Setty noted that the financial sector broadly anticipates continued fiscal prudence and consolidation. However, he stressed a critical issue from a banker's perspective: the absence of equitable tax treatment for financial instruments. "As a banker, there should be a level playing field for financial instruments, but there are fiscal constraints. Globally, we do not see special treatment for bank deposits. Equity instruments also do not receive special treatment in many jurisdictions," Setty explained.
This viewpoint is supported by SBI Research, which in a January 2026 report recommended aligning tax rates on deposit interest with capital gains to incentivize household savings in banks. The Indian Banks' Association has persistently demanded tax benefits for fixed deposits for several years. Currently, fixed deposits up to Rs 1.5 lakh qualify for deductions under the old tax regime, a system now largely bypassed by most taxpayers.
Shift in Savings Patterns and Systemic Risks
In recent years, a significant migration of investor funds toward mutual funds has been observed. The ratio of mutual fund assets under management to bank deposits has surged nearly threefold, escalating from 12.6% in 2015 to over 33.5% in 2025. While bank deposits have grown approximately three times over the past decade, mutual fund AUM has expanded more than seven times, illustrating a dramatic shift in savings behavior.
Other banking leaders have echoed these concerns, noting that deposit growth is failing to keep pace with credit demand. Savers are increasingly turning to equities for superior post-tax returns, which strains bank liquidity. Last year, Uday Kotak, founder and non-executive director of Kotak Mahindra Bank, remarked, "India's saver turns investor. Post-Covid, mutual fund AUM (mainly equity) has doubled to 31% of bank deposits," highlighting a structural transformation as individuals seek higher returns from capital markets.
In September 2024, MV Rao, chairman of the Indian Banks' Association and Central Bank of India, urged government intervention to address "the shift of money into non-banking assets such as equities and mutual funds," cautioning about potential systemic risks if deposit outflows persist unchecked.
The collective appeal from banking authorities underscores a pressing need for policy adjustments to rebalance savings incentives, ensuring financial stability and fostering a more equitable investment landscape.
