This article was first published in Outlook India.
As the country starts building up expectations from the last budget before the election year, as a platform dedicated towards helping the next 100 million Indians discover structured wealth creation, we have a wish list.
1. 80(C) deduction on Debt – DLSS – While we have seen a lot of inflow into ELSS and equity linked funds in general, providing a tax break into a Debt-Linked Saving Scheme would be great. Indians are inherently conservative investors and this gives a meaningful option to get returns better than all fixed income instruments. By introducing a lock-in of 3 years, the fund manager would also be able to eliminate interest rate risks if they want to do the same. This would put the debt funds at par with Debt based ULIPs.
2. Uniformity of risk communication across products under the purview of SEBI, IRDAI and PFRDA: Ideally, SEBI should be given an oversight of all market linked instruments in the country. Today, an average customer suffers because of conflicting messages coming from different market instruments – Insurance is subject matter of solicitation’, ‘Mutual funds are subject to market risk’, ‘Pension funds are safe. Even if the customer is looking at fundamentally the same investment risk, the messaging is often confusing and they end up taking a wrong financial decision
3. Increasing tax deduction under 80(C) to 2.5 lakh – The ceiling of 1.5 Lakhs reflects an income pyramid very different from today. This change would lead to a higher proportion of savings finding their way into long term investment instruments. And the additional tax savings will find their way into consumption. This is a clear win for the small investor! This would also be a good relief for first time investors since RGESS has been scrapped.
4. EEE status for NPS: NPS is an instrument that has a long way to go to come at par with other long term savings or investment products. Today, it is taxed at withdrawals and annuity is taxable as well. The finance minister will do well to give Exempt-Exempt-Exempt status to the income and gains from NPS investments. This would help lock-in low cost funds for a very long period of time.
5. Pension funds reform: As fertility rates in the country have fallen to 2.2 (Ref: NHRC-4), the pension burden over the next two decades is going to increase significantly. We would expect the finance minister to undertake significant pension fund reform by opening the mandate and flexibility to manage investments. Moreover, as India starts greying at a much faster rate, it would be good to lay down foundations for faster distribution of pension solution. Ideally, incentivise distribution much better and more flexibility in construction of solutions.
6. Municipal bonds to be included under infrastructure bond investing: Given that infrastructure in most cities in India is crumbling, the government should empower the local municipal corporations to raise bonds under exemptions for Infrastructure investing. This would reduce the cost of funds for municipalities because today they get normal credit ratings from AAA to D and the cost of funds changes dramatically given the rankings they might attract. It is a dual relief for the citizen – better infrastructure and more savings!
7. Take off the tax break cap on purchase of additional real estate: The current cap of Rs.200,000 on the exemption for the additional real estate purchase has completely killed the investment market in real estate. Bringing this back can throw a lifeline to HFCs and NBFCs with a big exposure to real estate.
8. LTCG on equity investments: LTCG on equity investments should be removed for investments held for more than two years. This would encourage consumers to stay invested for longer. For short term investments, the government can benefit from additional collections.
9. Abolish STT: STT adds to the cost of passive investing instruments like index funds and ETFs. Even on actively managed funds, the costs add up especially in arbitrage funds. As the country embarks on financialisation of savings, this is a tax on good behaviour and deserves to go.
10. Jump-start manufacturing: The Indian services sector is hitting a limit on scaling as trained work force has been difficult to get. The wage inflation in most cities are real as reflected in the high operations costs for all internet driven businesses like Ola, Uber, Flipkart, Amazon and Swiggy. While they are good drivers of employment generation, the government should support traditional sectors like garment manufacturing, warehousing, electronics and auto-manufacturing.
11. Make a separate allowance in 80C for equity investing. This will encourage more people to invest in equity and raise awareness for equity investments across the country
12. Increase short term capital gains tax on equity investments – This will deter speculation and encourage long term investing
13. Bring ULIP and MF taxation at par: No differential treatment for ULIP and MF products