The research wing of SBI has proposed a recast of the tax paid on the interest rate on retail bank deposits.

The tax on the deposits should be delinked from the slab rates under IT rules.

This will make deposits more appealing to young investors who are opting for mutual funds and stocks.

“Remarkably 47 per cent of term deposits are now held by senior citizens, implying the younger cohort is increasingly shying away from traditional avenues like bank deposits,” the SBI Research report said on Monday.

“In contrast, the median age of all investors in capital markets is now 32 years with around 40 per cent of investors being less than 30 years.

“Clearly, we are of the considered opinion that government should tweak the tax on interest on deposits and delink tax treatment at the highest income bucket. The tax treatment should be at redemption and not at accrual basis for bank depositors,” the report said.

At present, the interest on bank deposits — both demand deposits (savings) and time deposits (fixed) — are added to the total income of the individual and taxed at the slab rates.

Capital gains on the other hand are taxed at 20 per cent for short-term gains and 12.5 per cent for long-term gains.

The SBI Research report said that bank deposits, despite being better on the liquidity and safety fronts, have been faring poorly against risky alternative avenues.

While the average term deposit interest rate in the 1-3 years bucket is 6.55 per cent, the 1-3 years annualised returns on mutual fund was 40.16 per cent and the Sensex return was 24.85 per cent in FY24.

SBI Research said uniform tax treatment will have minimal impact on government revenues.

The report further said states with lower per capita income than national average has more preference towards CASA deposits while the per cent share of term deposits is higher in the states with per capita income higher than national average.

“Such divergences could imply that banks in India in future need to evolve towards products that could cover the life cycle needs of the customer,” the report suggested.

“Since states in India exhibit different characteristics, it might be better to think of bespoke products suited to the customers of different states,” the report said.