It’s that time of the year when we all are eagerly anticipating the upcoming budget which will be unveiling the new initiatives and major announcements by the government. A survey conducted by Bajaj Capital has shown that the obvious expectations from the Union Budget 2018 may be to increase the limit of tax-exempted income, an increase in Sec 80C investment deduction limit, re-introduction of Standard Deduction for salaried taxpayers to the extent of 10% of annual salaries and the continuation in the exemption of long-term capital gain from equity mutual funds.
While these solutions will, of course, help incrementally, what is truly needed is a fundamental shift in the way Indian households look at personal financial planning and wealth creation in India.
Proactively, our government has taken many initiatives. It has launched innovative schemes to wean away citizens from buying physical gold and instead invest the same in Sovereign Gold Bonds. Another innovative scheme is Sukanya Samridhi that encourages citizens to save for their girl child. The RBI has also launched GOI 7.75% Savings Taxable Bonds, which assure fixed returns for next 7 years without any upper investment limit. The Centre has also created the platform for Universal Social Security in future, through the Jan Dhan programme and linking it with Aadhaar.
These are good moves but they benefit only a certain class of people numbering a few lakhs. Another significant move has already been done for Employees’ Provident Fund (EPF) to begin allocations up to 15% of their corpus in equity markets as against the limit of 5% earlier. This would provide that additional kicker to returns of the investors.
Creating nest egg
What needs to be done as a next step is to empower and allow each working class and self-employed to choose their own pension plan, so that they can decide how much they wish to invest in equity and debt, as a part of their retirement plan. By design and mandate, National Pension System (NPS) provides this opportunity to every government employee and results over the past decade have been phenomenal. But it is still optional for private sector employees to participate in a NPS.
The NPS offers a mix of asset allocation i.e. equity, corporate debt, and government bond. The move of making NPS mandatory for private sector employees would be profitable as the return on EPF savings this year is only 8.65%. In comparison the NPS offers multiple asset allocation options to choose from, with varying rates of returns that can even go in double digits in the long term. NPS is especially important for working population under 40 years of age who still have 20 years for retirement. NPS can be used as the main vehicle for wealth creation and retirement planning.
Recently, PFRDA has also allowed transfer of superannuation funds into NPS, which is getting enough attraction among employees approaching retirement age.If the government were to look to merge the functions of EPF and NPS and enable every working class and self-employed Indian to choose their retirement cum pension plan, as per their needs, the flexibility allowed in NPS structure would revolutionize the way Indian households plan for their financial future. The recommendation is that all incremental money start going into NPS and later on the functioning of EPF and NPS can be merged. The recommendation is that NPS should become EEE like EPF and be made mandatory for private sector employees. In this decisive year of NDA regime, we need something bold and revolutionary from our FM!
The writer is chairman and managing director, Bajaj Capital