Bank deposits could rise faster post the tax change on debt mutual funds, says CARE Ratings

capital gains from debt funds, international funds, and gold funds, irrespective of their holding period, will be taxed per an individual’s relevant tax slab. Income from bank FDs is also taxed the same way.

Bank deposits could rise faster given that the union government has removed the long-term tax benefits from debt mutual funds compared to time deposits, rating agency CARE Ratings Limited said in its report on March 27.

On March 24, 2023, Lok Sabha passed the Finance Bill 2023 with amendments that contain proposals related to taxation and government spending, was passed with several amendments.

Also read: Bank deposits and debt MFs 'Overlapping, but not competing,' says SBI Chairman as taxes turn unfavorable for latter

In the finance bill, 20 more sections were added to the Bill besides the existing ones. The bill proposes that income from investments in MFs where not more than 35 percent is invested in stocks of Indian companies, i.e., debt funds, will now be considered short-term capital gains.

That is, capital gains from debt funds, international funds, and gold funds, irrespective of their holding period, will be taxed per an individual’s relevant tax slab. Income from bank FDs is also taxed the same way.

According to the agency, bank deposits grew at a slower pace at 10.3 percent year-over-year (y-o-y) in the fortnight ended March 10.

Meanwhile, in absolute terms, bank deposits have increased by Rs.16.8 lakh crore from March 2022. It also increased by Rs.0.97 Lakh crore from the immediate previous fortnight (reported February 24, 2023).

Bank Credit growth offtake rose by 15.7 percent y-o-y.

The credit offtake rose by 15.7 percent y-o-y for the fortnight ended March 10, 2023, said the report.

The Mumbai-based rating agency said that the credit growth has been robust in FY 23 driven by the lower base of the last year, unsecured personal loans, housing loans, auto loans, higher demand from NBFCs due to cost optimisation & requirement for their own growth, higher working capital requirements due to elevated inflation from select industries and depreciation of Indian Rupee (INR).

The report further highlighted that credit offtake rose by 15.7 percent year on year (y-o-y) for the fortnight ended March 10, 2023, compared to 8.5 percent from the same period in the last year (reported March 11, 2022).

In absolute terms, credit offtake expanded by Rs.18.4 lakh crore to Rs.135.5 lakh as of March 10, 2023, from March 2022.

"The banking system liquidity has generally been trending down with RBI seeking to manage elevated inflation. Given the liquidity issues and rising interest rates, RBI has conducted VRRR auctions to manage liquidity, " said the report.

In terms of absolute growth, credit offtake rose by 31.9 percent from March 27, 2020, whereas deposit growth came in at 32.3 percent. Credit growth almost reached deposit growth in the period. Major growth has been reported in FY23 compared to FY22 and FY21.