New Delhi, Nov. 5 -- Is it time to put a special tax dispensation in place for interest on bank deposits? This may sound antithetical to the government's approach so far of running an alternative income tax regime in parallel that levies lower rates but without exemptions or concessions. Yet, there is a compelling case to rework how income from deposits is taxed.

Deposits should not be seen as just a part of the banking business guided by market forces. Critical contributions are made to nation building by the deployment of these funds.

First, banks are mandated to maintain a statutory liquidity ratio, whereby they must invest 18% of deposits in government paper. The ability to invest in government security auctions is contingent on how...