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HomeBusinessTax on bank deposit...

Tax on bank deposit earnings likely to go up by 2%

To offset potential revenue losses from proposed tax relief for the salaried class and other sectors, the Federal Board of Revenue (FBR) is considering a 2% increase in the tax rate on interest income from commercial bank deposits and savings schemes in the upcoming 2025–26 budget.

The proposed hike would apply to both filers and non-filers.

The International Monetary Fund (IMF) has asked the government to present detailed tax proposals to bridge the anticipated revenue shortfall.

This gap has emerged as formal sector volumes have declined following the steep tax increases introduced in the 2024–25 budget under the IMF programme.

“It is one of the options to increase tax rates on passive income, as individuals as well as companies place money in commercial banks and saving schemes,” one top official said while talking.

“The current tax rate on interest income for filers was 15%, while for non-filers, it was increased to 35%. It is under consideration to jack up tax rates for both filers and non-filers by 2% on their passive incomes in the next budget,” they added.

The official said that the IMF had not yet granted its final nod on this tax proposal.

Dr Muhammad Iqbal, former FBR Member Tax Policy, when contacted, said that the rate at 15% on interest income was already quite high because the bank deposits on which income was received from banks also arose from income which was already subjected to tax at the time of its earning.

Moreover, he argues that this rate of 15% is only applicable to interest income up to Rs5 million per annum.

For income exceeding Rs5 million, the normal applicable rate on the total income (including interest income) is payable. Interest income earned by companies is also taxable at the normal tax rate for companies (29% + surcharge + super tax).

“If this tax rate is hiked, it will make life difficult for those who depend on the interest income from their savings invested in banks and saving schemes. They are already suffering due to falling returns from banks owing to a reduction in policy rates.

The commercial banks will also suffer as their deposits may decline,” he added.

He was of the view that the tax rate on dividends was 15%, so why was the government considering creating another distortion?

On the other hand, the tobacco and beverages sectors took the stance that their volumes shrank and shifted towards untaxed products. The FBR high-ups sought assurances on increased tax collection if the rates were reduced. The beverage industry proposed to reduce the FED from 20% to 15%.

The tobacco sector’s contribution is going to reduce from Rs292 billion in fiscal year 2023-24 to Rs247 billion in the ongoing fiscal year ending on June 30, 2025, indicating a reduction of Rs45 billion in the outgoing fiscal year.

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