Banks to gain Rs 3 lakh crore in deposits

MUMBAI:  Banking sector is set to gain from the loss of mutual fund industry as government has decided tax returns from fixed-income mutual funds. As debt funds set to lose tax advantage from April this year, it would prompt investors to park their funds to bank fixed deposits because tax advantage was one of the biggest reasons for investors to choose debt funds over fixed deposits.

With debt funds now losing their tax advantage, banks are expected to get as much as $36 billion (Rs 3 lakh crore) in deposits from the asset managers, according to Sunil Mehta, chief executive officer of Indian Banks’ Association. The Ministry of Finance, last week, amended Finance Bill 2023, which classified income from debt mutual funds as a short-term capital gain.

Under the new rule, investments in debt mutual funds that are bought on or after April 1, 2023, will be taxed as short-term capital gains at applicable tax rates. Capital gains from debt funds, international funds, and gold exchange-traded funds (ETFs), irrespective of their holding period, will be taxed at an individual’s relevant applicable tax rate. The new norms are set to kick in from April 1, 2023.

This development is a big relief for the banking sector, which was facing the problem of slower deposit growth. In order to mobilise more funds and attract deposits, lenders have been raising deposit rates to make them more attractive to customers.

Credit offtake rose by 15.7% year-on-year for the fortnight ending March 10, 2023. In absolute terms, credit offtake expanded by Rs 18.4 lakh crore to Rs 135.5 lakh crore as of March 10, 2023, from March 2022. However, deposit growth witnessed a slower growth at 10.3% year-on-year compared to credit growth for the fortnight ended March 10, 2023. Deposits stood at Rs 179.6 lakh crore for the fortnight ended March 10, 2023.

For debt schemes of the mutual fund managers, there remains just a few more days to sell such schemes with tax benefits. Investment made in debt schemes before the end of this month will continue to enjoy tax benefits. There is sudden rush in the mutual fund distributors to sell debt schemes.

“Every year in March we see a push for Equity Linked Saving Schemes (ELSS), but this time the focus in on debt schemes due to recent development. We just have one week left to sell debt schemes with tax advantage and investors know this. They are also willing to invest,” a senior official of mutual fund company with large share of debt funds in total AUM told this newspaper.

Debt funds at a glance 

Rs 13 lakh cr: Asset Under Management of debt schemes of mutual funds as of February

Rs 7.26 lakh cr: Funds mobilised by debt schemes of mutual funds in February

Rs 7.97 lakh cr: Funds mobilised by debt schemes of mutual funds in January

Rs 40 lakh cr: Assets Under Management of mutual fund industry as of Feb

Rs 179.6 lakh cr: Total deposits of commercial banks as of March 10, 2023