Budget 2026: SBI Research seeks tax parity for deposits, GST clarity to strengthen household savings

As the Union Budget 2026-27 approaches, SBI Research has outlined a series of tax-related recommendations aimed at reviving household financial savings, easing compliance burdens and improving tax efficiency, while remaining consistent with the government’s fiscal consolidation priorities. The suggestions come at a time when global economic uncertainty is rising and domestic policy choices are increasingly focused on sustaining growth without compromising fiscal prudence.

In its report Prelude to Union Budget 2026-27, SBI Research flagged a steady decline in the share of bank deposits in household financial savings, a trend that it believes requires targeted tax intervention. According to the report, the share of bank deposits fell from 38.7 per cent in FY24 to 35.2 per cent in FY25, indicating a gradual shift of household savings away from traditional low-risk instruments. The report noted that this erosion could weaken the stability of financial intermediation unless corrective measures are undertaken.

Rationalisation of taxes

To address this, SBI Research recommended a rationalisation of the tax treatment of interest income earned on deposits. It suggested that interest income should be taxed at rates comparable to long-term and short-term capital gains, arguing that such parity would improve post-tax returns for savers and restore the attractiveness of bank deposits as a preferred savings avenue. The report emphasised that improved tax efficiency, rather than higher incentives, could help mobilise long-term household savings into the formal banking system.

Tax-saving fixed deposits

Another key recommendation relates to tax-saving fixed deposits. SBI Research proposed aligning the lock-in period of tax-saving fixed deposits with that of equity-linked savings schemes (ELSS), which currently have a three-year lock-in. The report suggested that reducing the lock-in period for tax-saving fixed deposits to three years would make them more competitive with market-linked products, encourage deposit mobilisation and do so without creating additional fiscal pressure.

TDS concerns

SBI Research also raised concerns over the impact of tax deducted at source (TDS) on savings bank deposit interest. It recommended removing TDS on interest earned from savings bank accounts, noting that the provision disproportionately affects small savers and households dependent on interest income. According to the report, eliminating TDS in this category would reduce compliance friction and simplify tax administration, while improving net returns for depositors.

GST clarity

On the indirect tax side, the report called for amendments to the Goods and Services Tax framework to reduce interpretational ambiguity and litigation. SBI Research specifically recommended revising the definition of Input Service Distributor under the GST Act to bring greater clarity. It proposed replacing the phrase “for or on behalf of distinct persons” with “for the benefit of distinct persons,” arguing that such a change would help prevent disputes and streamline the distribution of input tax credits.

The report also highlighted operational challenges faced by banks due to the application of GST TDS on banking services. It pointed out that interchange fees paid through settlement agencies such as NPCI, Visa and Mastercard are settled in real time, while invoice-level details are received later. This mismatch forces banks to deduct GST TDS upfront and subsequently claim refunds, leading to cash-flow and compliance difficulties. SBI Research therefore recommended that GST TDS should not apply to banking services.

Overall, SBI Research said its tax-related suggestions are designed to strengthen household financial savings, reduce unnecessary compliance costs and improve clarity in the tax system. The report underscored that such reforms would be especially important in an environment of heightened global volatility, where maintaining domestic economic stability and financial resilience remains a key policy priority ahead of Budget 2026-27.