Tax on FD Interest Now Hits Bank Funding Too

SBI’s one-year retail fixed deposit pays 6.25% before tax, while consumer prices rose 4.82% in August 2026. At the 30% slab plus the 4% cess, that card rate nets 4.30%, which is 0.52 percentage points below inflation. Tax on fixed deposit interest still follows ordinary slabs, and North Block is about to open the 2027-28 Budget file on that rule.

The fairness case writes itself. The funding case is the one that will sit in the Expenditure Secretary’s room. Term deposits already make up 61.6% of scheduled bank deposits, 61.8% of that term book now yields under 7%, and accounts of ₹1 crore and above hold 46.3% of term money. A cut in the tax on interest would not mainly rescue a ₹5 lakh household ladder. It would reprice the cheapest long money in the banking system.

After Tax, SBI’s 6.25% Deposit Falls Short of Inflation

State Bank of India’s public card rate for one year to less than two years is 6.25%, and the two-year to less than three-year bucket is 6.40%, on SBI’s retail term deposit card rates in force since 15 December 2025. Five years to ten years pays 6.05% to the public. Senior citizens get the usual 50 basis-point extra, and the We-care overlay lifts the five-to-ten-year senior rate to 7.05%. Savings accounts at the same bank still credit 2.50%.

The Ministry of Statistics and Programme Implementation printed retail inflation of 4.82% in August, up from 4.45% in July and 4.38% in June, with food at 5.95%. Rural inflation was 5.23% and urban inflation 4.31%. The print is provisional on the 2024-base CPI series. The Reserve Bank’s August policy round kept the repo rate unchanged at 5.25 per cent and projected CPI inflation of 5.0% for 2026-27, with a 5.9% peak in the December quarter.

Interest on a bank fixed deposit is taxed as it accrues, under Income from Other Sources, at the depositor’s slab. It is not a capital gain. A 30% taxpayer also pays the 4% health and education cess on that tax. On SBI’s 6.25% one-year public rate, the tax is 1.95 percentage points and the cash yield is 4.30%.

SBI CARD RATES AGAINST AUGUST INFLATION

The 12 lakh rebate under section 87A already sets tax to zero for a resident individual whose total income, including this interest, stays at or under ₹12 lakh. SBI Research noted that point when it lobbied before Budget 2026. The remaining bite is in the 20% and 30% bands, where a rupee of interest is taxed in full even when it only replaces purchasing power. Deductions that used to soften that bite, ₹10,000 on savings interest under 80TTA and ₹50,000 on senior deposit interest under 80TTB, still exist only if the taxpayer leaves the default new regime.

TDS is a cash problem on top of the rate problem. Banks withhold 10% once interest at that bank crosses ₹50,000 in a year, or ₹1 lakh for a senior citizen. The threshold is not an exemption. A depositor whose final bill is nil still needs a self-declaration on file, or waits for a refund. Debt funds bought after 1 April 2023 are also taxed at slab rates, but the tax waits until the units are sold, so the same 30% rupee compounds for longer inside the fund.

Term Deposits Now Carry Most of the Bank Book

The Reserve Bank’s Annual Basic Statistical Return on deposits with scheduled commercial banks for March 2026, released on 29 May, is the census behind the political argument. Aggregate deposits grew 11.5% year on year, against 10.6% a year earlier. The mix inside that stock has shifted for four years.

HOW BANK DEPOSIT MIX SHIFTED IN FOUR YEARS

Savers left 2.50% savings accounts for term money when card rates were high. Then the rate cycle turned inside the term book itself. The share of term deposits paying less than 7% jumped to 61.8% in March 2026 from 27.3% a year earlier. Original maturities of one to three years rose to 69.8% of term deposits from 50.4% in March 2022, while tenors up to one year fell to 8.8% from 16.7%. Public sector banks took 50.8% of the incremental deposits in 2025-26, private banks 38.6%. Regional rural banks’ share of the stock slipped from 3.2% to 2.9%.

The household sector held 59.3% of deposits at end-March 2026, still the largest block, though the Reserve Bank said that share had moderated. Non-financial firms rose to 18.5% from 17.7%, and financial corporations to 7.8% from 6.8%. Senior citizens were 20.0% of deposits, inside a four-year band of 19.8% to 20.2%. Credit grew faster than deposits, 14.1% against 11.5%, which is the funding gap banks take into a pre-Budget meeting.

SBI Research had already put bank deposits at 35.2% of household financial savings in FY25, down from 38.7% in FY24. Small savings still pay more than the SBI card on several tenors: the Public Provident Fund is 7.1% and the Senior Citizen Savings Scheme 8.2% for the July-September 2026 quarter. Those rates were held unchanged from the previous quarter.

Almost Half the Term Money Sits in Crore-Plus Accounts

The “common taxpayer” frame does not match the size table in the same RBI return. Term deposits of ₹1 crore and above were 46.3% of the term stock in March 2026. The ₹5 crore-and-above slice alone was 34.8%. Term deposits up to ₹5 lakh were 17.8%.

WHO HOLDS INDIA’S TERM DEPOSITS

• ₹1 crore and above: 46.3% of term deposits by value at end-March 2026.
• ₹5 crore and above: 34.8% of term deposits, and 0.05% of term accounts by number.
• Up to ₹5 lakh: 17.8% of term deposits, the retail ladder that political drafts usually describe.

A lower tax rate on interest would still help a salaried depositor in the 20% or 30% band. It would help a large treasury book more, rupee for rupee, because that is where the stock sits. Those balances are also the ones that can leave a bank for a mutual fund, a small-finance-bank quote, or a derivatives margin account when the after-tax gap widens. Banks know that. It is why the Indian Banks’ Association has asked for tax relief on deposits for years, and why the ask survived Budget 2026.

For a senior on the default new regime, the 80TTB deduction is gone and the extra 50 basis points on the card is doing the work that a tax break used to do. On SBI’s 7.05% We-care rate, the post-tax, post-cess yield is 4.85%, three hundredths of a point above the August CPI print. That is a rounding error, not a real-return cushion.

Budget 2026 Already Passed on Tax Parity

Finance Minister Nirmala Sitharaman presented the 2026-27 Budget on 1 February 2026 and left personal tax rates where they were. The new-regime slabs still run from nil up to ₹4 lakh, then 5, 10, 15, 20 and 25% through ₹24 lakh, and 30% above that. The ₹60,000 rebate still zeros tax up to ₹12 lakh of normal income. The salaried standard deduction stayed at ₹75,000. The Income-tax Act, 2025, applied from 1 April 2026 and renumbered the interest rules; it did not change the idea that deposit interest is slab-taxed ordinary income.

SBI Research, in its prelude to that Budget, asked for interest on deposits to be taxed in line with long-term and short-term capital gains, for the tax-saver FD lock-in to fall from five years to three to match ELSS, and for TDS not to apply on savings-bank interest. Equity long-term gains still sit at 12.5% with a ₹1.25 lakh annual exemption, and short-term equity gains at 20%. Chairman C.S. Setty put the same demand in banker language the day before that Budget.

As a banker, I would definitely say there should be a level playing field.

C.S. Setty, Chairman, State Bank of India

The 2026 Budget did not grant that field. It did raise securities transaction tax on futures and options, a move Sitharaman later tied to heavy speculation and losses among small retail traders. Household money that leaves a term deposit does not all go into a three-year ELSS folio. Some of it goes into products that the same Budget tried to make more expensive. The tax code still pays a saver more, after tax, to take market risk than to roll a one-year SBI deposit at 6.25%.

What a Lower Tax on FD Interest Would Change

The live drafts for 2027-28 are the same three that sat on the 2026 table. Each one moves bank funding and the income-tax base in a different direction, which is why a fairness memo is not enough for the meeting.

THE THREE FIXES ON THE TABLE

• Full exemption: Interest would compound through inflation, TDS on these deposits would fall away, and banks would likely see stickier term money at a lower advertised rate. The direct-tax cost would be largest on the 46.3% of term deposits already sitting in crore-plus accounts.
• A flat 10% rate: Accrual taxation would remain, so a cumulative FD would still raise a tax bill before cash is paid, but a 10% levy on 6.25% is 0.625 points before cess, not 1.95. It would line deposit interest up nearer the 12.5% long-term equity rate without pretending a deposit is a share.
• Capital-gains parity: Treating interest like equity LTCG and STCG, as SBI Research asked, would cut the top-end penalty and keep some tax on the book. It would also invite a legal fight over why contractual interest is being forced into a gains head, and it would not, by itself, fix annual accrual.

A fourth, quieter option is to rebuild 80TTB and 80TTA inside the default regime, or to lift the TDS thresholds again. That would help seniors, who still hold a fifth of deposits, without rewriting the head of income. It would not close the gap between a 6.25% card rate and a 4.82% price index for anyone already in the 30% band.

Exemption is the cleanest gift to a risk-averse household, and the most expensive gift to a corporate treasury that already occupies the top size buckets. A flat 10% is the compromise that still lets the department see the income every year. Parity with equity is the version banks can sell as a “level field,” and the version that most directly slows the leak into funds and F&O. None of the three is a small-saver scheme once 34.8% of term deposits live in accounts of ₹5 crore and above.

North Block Opens Pre-Budget Meetings on October 12

The Budget Division of the Department of Economic Affairs has set the 2027-28 exercise in motion. Expenditure Secretary Vumlunmang Vualnam will chair the pre-Budget meetings from 12 October 2026 through 13 November 2026, covering revised estimates for 2026-27 and budget estimates for 2027-28. Ministries have been told to load the Union Budget Information System by 6 October. Estimates of tax receipts are due by 15 October. The Union Budget is likely to be presented on 1 February 2027.

THE FY28 BUDGET CALENDAR

1. August 27, 2026: The Budget Circular 2027-28 sets the spending and receipts drill for ministries.
2. September 23, 2026: The meeting notice goes to departments, with no rescheduling for late data.
3. October 6, 2026: Ministries must finish Union Budget Information System entries.
4. October 12, 2026: Vualnam’s meetings begin, on the same date MoSPI is due to print September CPI.
5. October 15, 2026: Tax-receipt estimates are due.
6. November 13, 2026: The scheduled meeting window ends and provisional ceilings follow.
7. February 1, 2027: The Union Budget 2027-28 is likely to be presented.

October 12 will therefore carry two numbers into the same building: whatever September inflation prints, and the first round of spending ceilings. If CPI is still near 4.82% and SBI’s one-year public card is still 6.25%, the after-tax real yield on a 30% slab will still be negative. Banks will arrive with a funding gap, not a slogan. The question for Budget 2027 is whether North Block taxes that gap, or the inflation inside it.

Disclaimer: This article is news reporting and analysis of tax rules, bank deposit rates and official statistics, and it is for information only. It is not tax advice, investment advice or a recommendation to open, break or shift a fixed deposit, mutual fund or any other product. Readers should consult a qualified chartered accountant or registered tax practitioner, and where needed a SEBI-registered adviser, before changing a deposit or a tax-regime choice. Rates, slabs, TDS thresholds, inflation prints and Budget dates are those published by the named official sources as of the dates given in the piece and can change.