Union Budget 2026–27: SBI Pushes for Tax Concessions on Bank Deposits and Pension Reforms
The upcoming Union Budget 2026–27 has already started
creating expectations across the banking, finance, insurance, and pension
sectors. In a significant development, the State Bank of India (SBI) has
urged the central government to introduce tax concessions for bank
depositors and bring consumer-friendly reforms in insurance and pension
systems. This recommendation comes at a time when household financial
behaviour is clearly changing and traditional savings through banks are losing
ground.
SBI’s report reflects a growing concern within the financial
system: household savings are shifting away from bank deposits towards other
investment instruments. While this change may look positive from a market
participation perspective, it also raises serious long-term concerns about
financial stability, liquidity in the banking system, and social security
coverage in India.
This article analyses the SBI report, the trends in
household savings, and the reforms being demanded ahead of Budget 2026–27,
while explaining what these proposals could mean for ordinary bank customers,
salaried individuals, senior citizens, and long-term savers.
Decline in Household Savings in Bank Deposits
According to the SBI report, the share of household savings
parked in bank deposits has fallen from 38.7 percent in FY2024 to 35.2
percent in FY2025. This decline may look small in percentage terms, but in
a country like India with a massive population base, it represents a very large
shift of money away from the formal banking system.
For decades, bank deposits were considered the safest and
most trusted form of savings for Indian households. Fixed deposits, recurring
deposits, and savings accounts were the backbone of family financial planning.
However, rising inflation, lower real returns, and better returns from
market-linked instruments such as mutual funds and equities have slowly changed
public behaviour.
This shift has created two major challenges. First, banks
face increasing pressure in mobilising low-cost deposits, which affects lending
capacity. Second, households moving into high-risk investments without strong
financial awareness face long-term financial vulnerability.
To address this, SBI has clearly stated that tax
incentives for bank deposits are necessary to restore trust and
attractiveness in traditional savings instruments.
Tax Concessions on Bank Deposits: SBI’s Key Recommendation
One of the most important suggestions made by SBI is to
reform the tax structure on interest income earned from bank deposits.
Currently, interest earned on fixed deposits and savings
accounts is taxed as regular income under the applicable income tax slab. This
makes bank deposits tax-inefficient compared to long-term investments like
equities and mutual funds, where capital gains taxation provides structured
benefits.
SBI has recommended that the government should apply long-term
and short-term capital gains tax principles to interest income on bank
deposits. This means that depositors could benefit from lower tax rates if they
hold deposits for longer periods, similar to equity investments.
If implemented, this reform would transform the perception
of bank deposits from low-return instruments to stable, tax-efficient
financial products, especially for conservative investors, senior citizens,
and middle-class families.
This single reform alone could significantly boost household
financial savings through banks and improve liquidity in the banking
system.
Reduction in Lock-in Period for Tax-Saving Fixed Deposits
At present, tax-saving fixed deposits under Section 80C come
with a five-year lock-in period. SBI has recommended reducing this
lock-in period to three years, bringing it in line with Equity Linked
Savings Schemes (ELSS) of mutual funds.
This is a highly practical suggestion. Many investors avoid
tax-saving fixed deposits because of the long lock-in period and limited
liquidity. ELSS mutual funds offer tax benefits with shorter lock-in and potentially
higher returns, making them more attractive to young investors.
By reducing the lock-in period to three years, tax-saving
bank fixed deposits could regain competitiveness in the investment
ecosystem. This would particularly benefit risk-averse investors who want tax
benefits without market volatility.
This reform would support both financial inclusion
and deposit mobilisation, strengthening the banking sector’s long-term
stability.
Relief for Small Savers Through TDS Reforms
Another major recommendation in the SBI report is related to
Tax Deducted at Source (TDS) on interest income.
Currently, banks deduct TDS once interest crosses a certain
threshold, even for small savers and senior citizens. This creates cash flow
pressure and compliance burden, especially for low-income depositors.
SBI has suggested either eliminating TDS on savings bank
interest or significantly increasing the threshold limit. This would provide
direct relief to small depositors and encourage people to keep their money
within the formal banking system.
Such a reform would strengthen financial inclusion,
reduce unnecessary tax deductions, and improve trust between depositors and
banks.
Insurance Sector Reforms and Declining Coverage
The SBI report also highlights serious concerns in the
insurance sector. According to regulatory data, insurance penetration in
India has declined from 4.2 percent in FY2022 to 3.7 percent in FY2025.
Life insurance coverage has dropped to 2.7 percent,
while general insurance coverage has remained stagnant at 1 percent.
This decline directly contradicts the national vision of "Insurance for
All by 2047".
This trend is alarming because insurance is not just a
financial product; it is a foundation of social security and economic
resilience. Lower insurance coverage means higher vulnerability for
families during medical emergencies, accidents, and income loss.
SBI has stressed the need for consumer-friendly insurance
reforms, especially in health insurance and life insurance claim systems.
Nearly 69 percent of customer complaints in FY2025 were related to insurance
claims, highlighting systemic issues in claim settlement processes.
Without trust in claim settlement, insurance penetration
cannot grow, regardless of marketing or awareness campaigns.
Pension System Reforms and Minimum Pension Guarantee
The report also focuses on the pension sector,
stating that India lacks a strong, structured, and reliable pension system for
long-term income security.
SBI has recommended a minimum pension guarantee framework,
which would ensure basic income stability for retirees. In a country where the
majority of workers are in the unorganised sector, pension insecurity remains a
major social challenge.
A structured pension system would not only protect retirees
but also strengthen long-term economic stability by reducing dependency on
government welfare schemes.
Strong pension infrastructure is essential for building a sustainable
social security system in India.
Why These Reforms Matter for the Indian Economy
These proposals are not just policy suggestions; they
directly impact the future of India’s financial system.
Tax concessions on bank deposits would restore confidence in
traditional savings.
Insurance reforms would improve risk protection and
financial resilience.
Pension reforms would strengthen long-term social security.
Together, these measures create a stable foundation for economic
growth, financial security, and household stability.
The Union Budget 2026–27 therefore becomes a critical
opportunity for structural reforms rather than short-term populist measures.
Impact on Common Citizens
For the common Indian citizen, these reforms could mean:
More tax-efficient savings options
Better returns on fixed deposits
Simpler insurance claim processes
Stronger retirement security
Better protection against financial shocks
These are not elite financial reforms; they directly affect
salaried employees, small business owners, farmers, senior citizens, and
low-income households.
Final Summary
The SBI report presents a clear roadmap for strengthening
India’s financial system through tax reforms for depositors, insurance
sector restructuring, and pension system strengthening.
If these recommendations are adopted in Budget 2026–27,
India could witness a revival of household financial savings, improved social
security coverage, and stronger long-term economic stability.
These reforms are not just financial policies; they are
social protection measures that support families, retirees, and future
generations.
A strong banking system, trusted insurance sector, and
reliable pension framework together form the backbone of a resilient economy.
Read also: What’s the Minimum EPF Pension Now? Top Updates on EPFO Pension Hike
Use our Advance Tax Calculator – Calculate Advance Tax (FY 2025-26)
Frequently Asked Questions (FAQs)
How much can I deposit in SBI without tax?
There is no limit on how much you can deposit in SBI.
However, interest earned on deposits becomes taxable as per your income tax
slab. TDS is deducted if interest crosses the prescribed annual threshold limit.
What is the SBI tax-free scheme?
SBI does not offer completely tax-free deposit schemes.
However, tax-saving fixed deposits under Section 80C provide tax deduction
benefits, though the interest earned is taxable.
Will Budget 2026–27 give tax relief to depositors?
SBI has recommended tax concessions for bank depositors.
Final decisions will depend on government policy announcements in the Union
Budget.
Will FD lock-in period be reduced to 3 years?
SBI has suggested reducing the tax-saving FD lock-in period
from 5 years to 3 years, similar to ELSS funds. This is currently a proposal,
not yet implemented.
Why is insurance coverage falling in India?
High premiums, claim settlement issues, lack of trust, and
complex policy structures are major reasons for declining insurance
penetration.
Is pension reform expected in Budget 2026–27?
The SBI report strongly supports pension reforms, including a minimum pension guarantee system, but implementation depends on government decisions.
