Budget 2021 Roadmap: Need for greater choice in tax-saving investment options

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January 26, 2021 3:45 AM

Union Budget 2021 India: Budget 2021 should announce steps to improve credit access and enhance financial well-being by offering greater choice in tax saving investment instruments.

Budget 2021-22: The imposition of 10% tax on long term capital gains from equities exceeding Rs 1 lakh in a financial year has placed mutual funds at a disadvantage vis a vis equity oriented schemes offered through ULIPs and NPS.Budget 2021-22: The imposition of 10% tax on long term capital gains from equities exceeding Rs 1 lakh in a financial year has placed mutual funds at a disadvantage vis a vis equity oriented schemes offered through ULIPs and NPS.

Indian Union Budget 2021-22: The disruption caused by Covid-19 pandemic led to an unprecedented fall in economic activity, credit demand and overall financial well-being. Hence, Budget 2021 should announce steps to improve credit access and enhance financial well-being by offering greater choice in tax saving investment instruments.

Extend Section 80EEA benefits
Budget 2019 introduced additional tax deduction of up to Rs 1.5 lakh under Section 80EEA on account of interest paid by the first time home buyers for buying homes with stamp duty value of up to Rs 45 lakh. This deduction is over and above the Rs 2 lakh deduction available under Section 24b. While Budget 2020 had extended Section 80EEA to home loans sanctioned in FY19-20 as well, it should be extended to the next financial year and preferably made a permanent feature to stimulate demand in the affordable housing segment. Additionally, the upper cap of Rs 45 lakh should be increased to Rs 75 lakh to widen the coverage of Section 80EEA, especially in the metros.

Tax parity between equity funds
The imposition of 10% tax on long term capital gains from equities exceeding Rs 1 lakh in a financial year has placed mutual funds at a disadvantage vis a vis equity oriented schemes offered through ULIPs and NPS. The Budget should correct this anomaly by removing LTCG tax on all equity-oriented mutual funds or at least the tax saving mutual funds (ELSS).

Similarly, switching transactions from regular plans to direct plans or from dividend option to growth option within the same mutual fund scheme are considered as sell transactions and hence, are subject to capital gains taxes. The Budget should make necessary amendments in the Income Tax Act so that intra-scheme switching in mutual funds is not considered as sell transactions, just as is the case of ULIPs.

Extend Section 80CCD(1B) benefits
While investments in mutual fund retirement plans, notified by the Government as Pension Plan and insurance pension plans, qualify for tax deduction under Section 80C, NPS investors qualify for an additional deduction of Rs 50,000 under Section 80CCD (1B), which is over and above the Rs 1.5 lakh deduction available to NPS investments under Section 80C. Budget 2021 should extend the Section 80CCD(1B) benefits to the insurance pension plans and notified retirement plans of mutual funds to enhance consumer choice in the pension segment and create a level playing field for all types of pension plans.

Extend NPS Tier-II Taxsaver Scheme option to all
Budget 2020 introduced NPS Tier-II Taxsaver Scheme for central government employees. It comes with a lock-in period of just three years. The asset allocation ratio of this scheme has been fixed at 10-25% for equities and the rest in debt instruments. This year’s Budget should extend this option to the self-employed as well as employees of state governments and the private sector so they can benefit from the low cost investment offered by NPS and avail Section 80C deduction through debt-oriented investment, especially during overvalued markets, with a lock-in period of just three years.

The writer is CEO & co-founder, Paisabazaar.com

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