An open letter to Pranab Mukherjee

BSE | NSE 08/02/12

Dear Pranab Babu,

Like the rest of India, I too am waiting eagerly for your defining speech on July 6. We are all hoping for a Big Budget. And yes, I do realise that while there would be larger macro issues occupying your mind, on how to take the Indian economy further, while keeping the fiscal deficit under control, I would like to take the liberty of sending some thoughts to you on how your Budget can make our financial planning easier and put more money in our wallets.

As you know, India is known to a nation of savers and not investors. And whatever little investment we do, is largely driven through tax benefits. So yes, while we are changing, the overhang of tax benefits driving our financial planning remains. So if you do want retail money to be converted into equity capital for funding India's growth, I doubt you can ignore giving some tax benefits.

But rather than simply hiking the exemption limit by another Rs 50,000, I would suggest a more focussed approach. Let me remind you, when your government brought in a Rs 10,000 special pension plan tax incentive (of course it got merged with the overall Rs 1 lakh exemption subsequently) every one bought pension plans of only Rs 10,000. Little realising that it would give them a pension of no more than Rs 3,000 per month after 20 years! The point I am making is: we unfortunately get too driven by the extent of tax sops, and not our own requirements and needs-the fundamental basis of financial planning.

So please do not make any piecemeal changes. Last year, some attractive sops were given for health insurance. Much needed, but till today most insurance companies do not even have products that can help me get the entire benefit. I see that changing this year, so please maintain that benefit.

On the exemption front, please redefine the categories. I cannot understand how a child's education fee can be clubbed with an equity-linked saving scheme in the same category! Yes, education needs to be encouraged, so move the tax sop for that out of this overall window, like your government did with health. Similarly, housing for all is a goal for the nation. So yes, keep the incentives going for housing, in fact increase them, but keep it out of the Rs 1 lakh exemption window (for principal repayment).

The window of exemption-certainly needs to be hiked beyond Rs 1 lakh-should focus on investment. Again, here it needs to be clearly differentiated and standardised, depending on the nature of investment. How can PPF, a five-year bank fixed deposit, a ULIP and an ELSS, all be in the same bracket? It would make sense to split them into categories: long term and short term. So insurance, pensions go into one category and shorter term ELSS and perhaps a three-year bank FD (instead of five) fall into the other.

Given the huge for funds towards building our infrastructure, my sense is you will come up with some sops for infrastructure. But rather than offering these only through bonds, please do offer an incentive for equity as well. So instead of sticking to only ELSS, you could include infrastructure funds as well (and there are lots to choose from).

You have, as a government, taken a stand in the past that small saving schemes like NSC, KVP etc will not see any change in their rates. Clearly, the strategy has been to push investors towards taking some risks rather than being dependant purely on the government for their financial planning. My sense is: you will maintain the strategy but in doing so, please make sure there are enough incentives for investors to go to the capital markets. Because that is the only way the markets will attract household savings.

In the meantime, I promise you, we will keep trying our best to educate investors on keeping their financial goals separate from their tax saving goals! But till then, all eyes on your Budget speech. I wish you good luck.

Regards

Vivek Law

National Editor,

CNBC-TV18