Power Point
Will FM deliver a savings nudge for the long term?
This Budget has the potential to change the way individuals plan for their retirement
As a student of finance first and then as a finance executive, I looked forward to Budget announcements every year on 28 February with trepidation. In the initial years, it was all about which industry would benefit from or be doomed by an overnight change in customs duty rates; later, as the focus changed to “me”, it was all about personal income tax rates. You must remember that over two decades ago, earnings were not high and hence any reduction in taxes had the potential to increase your savings. Moreover, investor behaviour was fashioned in a big way through tax incentives.
The current Section 80C that allows for a maximum deduction of up to ₹1.5 lakh every year from an investor’s total taxable income was earlier Section 88, where the limit was ₹70,000 annually. I recall my early days of employment in the mid-1980s where my insurance agent magically turned up at my residence soon after I had got my increment. My father had called him and asked for a life insurance policy quotation with a premium of ₹32,000 per annum, by which my Section 88 limit was short. He happily sold me an endowment plan for 25 years with a life cover of ₹5 lakh. The tax break was my only priority; and a plan that returned the premium and provided a return on it met that need—the concept of term cover was unknown to me then.
After the advent of private sector insurance companies, we were encouraged to buy pension plans with an annual premium of ₹10,000, an additional tax break for this payment was provided. From the viewpoint of the government, what they were seeking is mass impact—get many citizens to plan for their retirement; for the individuals who were not financially literate, there was a feeling that such an amount would be adequate. To that extent, the Budget created a sense of false relief as individuals saw only as far as the tax breaks.
Over the years, Budgets have been used to influence investor behaviour—there was the time in the late 1990s and the start of the previous decade where housing was a big thrust, when interest on home loans got an additional tax break. Coming as it did with the fall in interest rates at that time, and an increase in individual’s earning levels, the real estate market boomed. If you borrowed for investment in a house property and rented it out, the entire interest amount without limit was available as a deduction from your rental income. Of course, the discerning few took advantage of this and built a real estate portfolio. Recently, the limits on the interest payment for rental properties were reduced in sync with the cooling of the real estate market.
In the absence of financial literacy being imparted in schools and colleges, I think Budgets can be a powerful “nudge” for individual investors. Consider this: India does not have a social security system, life expectancy is increasing while the joint family system is being replaced by nuclear families. At the same time, investing in traditional instruments like fixed deposits is fraught with danger of inflation rates being higher even if for short periods of time. All this points to something that discerning investors have figured out already: that they need to provide for their retirement on their own, and that too for a longer time horizon.
As interest rates head south in India, there is a higher danger of inflation popping its head higher more frequently, and hence a precaution for rainy days, of which there may be many in the long stretch of retired life, is essential. There is enough evidence to show how the risk of loss in equity investing is reduced if the time horizon is stretched. Over longer periods of time, the excess returns that the equity asset class can get will provide the buffer that is so very much needed.
Can the Budget do enough to promote planning for retirement? Can disciplined, long-term investing be incentivized? Could we provide for a “loyalty bonus” for investing longer in equities? Should not a lower tax rate apply if investments are made for longer periods of time? Would it not be a win-win for the investor and the fund manager, if these investments were forced to be held for longer?
The investor experience would certainly be better as the volatility as well as the loss potential would be reduced. This Budget has the potential to change the way individuals plan for their retirement and help them go through the golden years with peace of mind. The only question is whether this is on the priority list for the finance minister. We have just a few days to find out.
Lovaii Navlakhi is managing director and CEO, International Money Matters Pvt. Ltd.
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First Published:26 Jan 2021, 05:07 AM IST
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