The need of the hour is a nudge towards long term savings. However, given the decades of familiarity with fixed returns, the concept of market-linked returns on a retirement product will take a while to be accepted.
The budget is just around the corner. Expectations from this “never before" like Union budget are many—will it give more tax relief to individuals or introduce a Covid-19 cess? Manufacturers have suggested the removal of a limit of ₹2 lakhs on interest levied on home loans or increasing the long-term capital gains exemption limit on equities from ₹1 lakh. But what does the aam aadmi want the most?
Dear finance minister, here are my suggestions based on interacting with thousands of individuals during my financial literacy programmes.
The government can promote and provide nudges for long term savings. Not only will this benefit taxpayers and the economy positively, but it's also the need of the hour. Currently, the main long-term saving that is done by the salaried class is in the form of EPF (employees provident fund) investment. NPS (National Pension Scheme) is being considered but, given the decades of familiarity with fixed returns, the concept of market-linked returns on a retirement product will take a while to be accepted. But the additional tax benefit on NPS certainly provides a nudge.
a) The government may consider increasing Section 80CCD (1B) limit for individual contribution to NPS from ₹50,000 per annum to ₹1 lakh per annum. Currently, this sub section gives a deduction only for contribution to NPS. This can be widened to also include other retirement products like retirement funds from mutual funds.
b) The last budget made employer contribution to a recognized provident fund, superannuation and NPS, above ₹7.5 lacs per annum, taxable as a prequisite. This is a deterrent to long term savings and can be removed.
c) In a person’s financial life, the two most important financial goals are retirement and children’s education. The government may consider providing tax exemption (up to a limit) for contribution to a child education savings scheme like child plans from mutual funds. The government can even consider setting up the equivalent of a 529 account in the US, to help citizens save for children’s higher education. The fund can be structured like NPS to provide a choice of different equity: debt allocations and contributions can be made tax deductible up to an extent.
d) One tax regime : A common query in our sessions was on which regime to choose from. People find it difficult to assess the long-term impact of the tax regime chosen. Given, that most taxpayers file returns themselves, they are grappling with the consequences of letting go of tax benefits like 80C, LTA, Section 24 etc. Hence the government may consider having just the old tax regime.
a) Increase the tax exemption limit for senior citizens to ₹10 lakhs. With the falling interest rates, senior citizens are finding it difficult to manage expenses. The low interest rates are the cause for elders to invest into riskier investments like NCDs or AT1 bonds, chit funds etc. Increasing the tax exemption limit would reduce their tax burden and give them more cash in hand for their needs.
b) Furthur, deduction under section 80D for health insurance premiums can be increased to ₹1 lakh per annum for senior citizens. With medical inflation at 18-20% levels, health insurance premiums have risen by 15-30% and ₹50,000 per annum can get only small covers, which are grossly inadequate.
c) The GST on health insurance is 18% and certainly needs to be brought down to 5%. Such essential expenses, which are needed for the protection and wellbeing of citizens, shouldn’t be in the 18% GST category. With high insurance costs, the GST amount that is allowed to be claimed under Sec 80D is not really a benefit.
d) Given the high costs of treatment of malignant cancer, renal failure and neurological diseases, the Sec 80DDB limit of ₹1 lakh (for senior citizens) may be enhanced further.
These proposals should help senior citizens lead a decent life of dignity and not be dependent on their children financially.
All the above suggestions can help the government protect its citizens better.
Mrin Agarwal is the founder of Finsafe India Pvt. Ltd and the co-founder of Womantra. Views expressed are his own.