By V Krishna Dassan
The Finance Minister has announced that there will be no new taxes levied on the middle class and the forthcoming budget will be middle-class friendly. While this is consoling news, the middle class needs some favourable announcements to create an adequate investible surplus, to create sufficient wealth.
Favourable Tax Slabs
Though a New optional Tax Slab Regime was introduced in 2020, most taxpayers still utilise only the old regime in the absence of exemptions in the New Regime. The Old slabs remain unaltered for a long leaving a lesser investible surplus with taxpayers after keeping for inflation. With jobs getting severely affected post covid in terms of loss of jobs or compromised salaries, and a series of layoffs now being announced by startups and even large Corporates, the budget is expected to be kind by introducing favourable income Tax slabs.
Long-Term Capital Gains Tax on Equities
Inflation hit the roof to the level of 7% during 2022 which would mean the real returns from Fixed Deposit being negative net of inflation and income tax. Now that fixed deposit interest is high, investors tend to flock more to this product which would see a diversion of money from risky assets like equities to FDs. That is not a desirable situation for the economy and for the investment portfolios of investors as equities offer better real returns and investors look for waiver of long-term capital gains from equities to see even healthy real returns.
Budget 2018 introduced a 10% tax on long-term capital gains from equities which were tax-free until then. Investors wish to see the long-term capital gains tax waived again and it may be rational even if the long-term capital gains period has to be extended to 3 years from the prevailing 1 year as equity investments are anyways advisable to be held longer to reap better returns.
Though post covid the number of Demat accounts opened has skyrocketed and surpassed 10 Crs in 2022. As per reports though 66% of the number of existing Demat accounts have been opened post-April 2020, they account for only 18%(₹65 trillion) in value terms. This reveals the tepid activity in the new accounts opened which can see great progress if the Long Term Capital Gains Tax gets waived. Similarly, Systematic Investment Plan (SIP) in Mutual Funds which are increasing in popularity will further spike with such a move. This would enable increasing equity penetration for the benefit of the country and individuals.
Exemption on healthcare expenses
The exemption on Medical Allowance for long was Rs.15000 for a Financial Year. Budget 18-19 clubbed this and the annual transportation allowance of Rs.19200 and made it a standard deduction of a total of Rs.40000 in a year. However, in a country where the average medical inflation is in double digits, the exemption on Medical Allowance has nowhere taken care of the medical inflation over the years. This needs to be addressed in the budget.
On the same lines, the exemption on Health Insurance premiums under Section 80D, which is for up to Rs.25000 in a year for those under 60 years, is inadequate. With the soaring healthcare expenses, for a person above the age of 45 to cover self, spouse and 2 children for 10 lakhs under a comprehensive health insurance policy, the premium is more than Rs.25000 for a year. In a country which is still far away from providing Social Security Schemes matching developed countries atleast the expenses borne by the citizen can be exempted fully.
Popularising and incentivising NPS
The National Pension System(NPS) which is pretty attractive with a score of Tax Exemptions is still to reach most investors. The government should consider increasing the tax waiver on NPS from 60% of the maturity to 75% to make it more favourable as an investment avenue. The low popularity of NPS is also due to the low revenue to distributors which the budget should consider and incentivise distributors.
Financial Literacy
There have been voices in favour of Financial Literacy, the latest being from Karnataka MP, Tejasvi Surya. India has a long way to go in Financial Literacy and the budget should allocate a part of the Education Cess kitty to inculcate Financial Literacy and even introduce in the School and College Curriculum. Without Financial Literacy any amount of measures introduced in a budget will go under noticed and underutilised.
(V Krishna Dassan, Director – Wealth Management, Dhanavruksha Financial Services. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)