Budget 2023 is just under two months away. While it’s a given that small investors always look for more tax deductions and respite on income tax rates, some fear the Union budget may increase the tax burden to augment revenue. However, Deepak Chhabria, founder and managing director of Axiom Financial Services, says, “Investors prefer predictability and stability in tax laws. So the government should not make big changes in taxation which would unnerve investors. Instead, a rationalisation of tax rules with inbuilt incentives should attract investments.”
Increased tax shelters
Inflation has been ruling high for almost a year and there are expectations that it will take some time before it cools, and the hope is that the government takes note of this and offers some respite to investors.
Deduction under Section 80C has been capped at Rs 1.5 lakh and there are many instruments including contributions to the Employees’ Provident Fund, public provident fund, Sukanya Samriddhi Yojana, equity-linked saving schemes (ELSS), National Saving Certificates, tax-saving bank fixed deposits, life insurance premiums along with home loan principal repayments that are eligible for it. The general feeling is that it is high time that the finance minister raises the quantum of deduction.
“The dated threshold to avail deductions under Section 80C must be revised. There is a sense of urgency attached to this revision considering growing incomes, ability to financialise savings and the economic need to route savings to investments,” says Nirav Karkera, head, research, Fisdom, a financial advisory firm.
Some experts also insist that it is better that the limit under Section 80C is linked with inflation, enabling savings even if prices trend upwards.
For most households, social security is a core focus area. In a bid to address this, the government rolled out the National Pension Scheme (NPS) and unveiled a string of tax sops to make it popular. Contributions up to Rs 50,000 in a financial year to the NPS are eligible for deduction under Section 80CCD 1(B). At a time when a few state governments have decided to offer the old pension scheme replacing NPS, the government may want to make NPS more attractive.
“In the light of rising demand for social security, the government may want to increase the deduction available to NPS from Rs 50,000 to a higher level, perhaps Rs 1 lakh,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors.
Rationalisation of tax rates
Taxation of capital gains is a hot topic ahead of the budget. Many hope that the government may want to remove at least some of the complexity around this, with different asset classes and products having differentiated rates of taxation and thresholds to qualify for the lower rate of tax.
“For listed bonds, the gains are taxed as long-term capital gains if they are held for one year. However, to be termed as long-term capital gains, debt, real estate and equity funds need to be held for three, two and one year, respectively. The rate of tax also vary, which leads to confusion. The government should rationalise this,” says Dhawan.
Bring tax parity between mutual funds and insurance
Two products investing in the same asset class attracting different rates of tax naturally see differentiated responses from investors.
For example, proceeds from unit-linked insurance plans (ULIPs) are tax-free if the yearly premium is less than Rs 2.5 lakh, the sum assured is at least 10 times the premium paid and the product is held for at least five years. However, no matter how long one holds on to units of equity funds, the investor has to pay long-term capital gains tax at 10 percent after completing one year. “There is a need for parity in tax treatment on gains of ULIP and equity mutual funds. Even a switch from one plan to another of a mutual fund scheme—say, from a growth to dividend plan—is considered a ‘sale’ and attracts capital gains, whereas switching from one fund to another under ULIP is not considered a sale. The government needs to address such gaps,” says Sanjay Shah, founder and managing director, Prudent Corporate Advisory Services.
Shah further insists that long-term retirement-focused investment plans with dedicated tax benefits be introduced. “Though we have ELSS that invest in stocks and offer tax deduction, it is high time the government rolls out a debt-linked saving scheme that offers tax deduction for investing in bonds, maybe with a five-year lock-in to boost savings in bonds,” he adds.
While the distributor community hopes for the best from the Union budget, any increase in tax rates may force investors to recalibrate their investments.
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