Flat 15% tax on FD interest? SBI proposes major relief for bank depositors ahead of Budget 2027

Fixed deposit investors could see a significant change in how their interest income is taxed if a proposal by SBI Research is accepted. In its latest Ecowrap report, dated November 2, the bank has recommended replacing the existing tax treatment of term deposits with a flat 15% tax rate across all maturities.

The proposal could particularly benefit depositors in higher income-tax brackets, who currently pay tax on FD interest according to their applicable slab rates. SBI estimates that implementing the change would cost the government approximately ₹10,500 crore in annual revenue.

Why is SBI proposing a flat 15% FD tax?

Currently, interest earned on fixed deposits is generally added to an individual's taxable income and taxed according to the applicable income-tax slab.

This means investors in the 30% tax bracket can face a substantially higher tax burden than those in lower brackets, reducing their effective post-tax returns.

SBI Research argues that the taxation of bank deposits needs reconsideration to prevent household savings from becoming disproportionately tilted towards equity investments.

The report warns that without changes in deposit taxation, incentives for investing in equities could significantly outweigh those available for traditional bank deposits.

Such an imbalance could affect banks' ability to attract stable deposits, which remain essential for financing credit growth.

How much could FD investors save?

Consider an investor earning ₹1 lakh annually as fixed deposit interest.

Under a simplified calculation excluding cess and surcharge, someone taxed at 30% would pay ₹30,000 in tax, leaving ₹70,000 after tax.

If a flat 15% rate were introduced, the tax liability would fall to ₹15,000, increasing post-tax interest income to ₹85,000.

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For an investor in the 20% bracket, the potential saving would be ₹5,000 on the same interest income.

However, the proposal may not benefit everyone equally. Investors currently paying tax at rates below 15% could face a higher burden if the flat rate were applied universally without exemptions.

The report does not specify how existing exemptions, rebates or deductions would interact with the proposed system.

Bank deposits losing share in household savings

SBI's proposal comes amid changes in household financial savings.

According to the report, bank deposits accounted for 39.4% of household financial savings in FY24, falling to 32.7% in FY25 before recovering to 35.5% in FY26.

The bank believes favourable tax treatment could help strengthen deposit mobilisation and support financial stability.

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Meanwhile, foreign portfolio investment trends have also intensified discussions around equity taxation.

Data compiled by JM Financial shows foreign investors have been net sellers of Indian equities for three consecutive financial years, with outflows of $14.9 billion in FY25, $21.9 billion in FY26 and approximately $17.7 billion in FY27 through October.

Against this backdrop, SBI has separately proposed rationalising long-term capital gains taxation to encourage equity investment.

Savings account holders could also benefit

Alongside FD taxation, SBI has recommended doubling the savings account interest tax exemption threshold from ₹10,000 to ₹20,000.

It estimates the move would cost the exchequer approximately ₹1,531 crore.

Together, the proposed changes to savings and term deposits could result in revenue foregone of around ₹12,000 crore.

For depositors, the proposals could improve post-tax returns and make bank deposits more competitive. However, these remain SBI Research recommendations, and the government has not announced any change to FD interest taxation.

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