The Newly appointed Finance minister Nirmala Sitharaman announced the maiden Budget for the Modi 2.0 government on Friday. While bringing in a slew of reforms for farmers, infrastructure and NBFC’s, the government seems to have done precious little to augment the personal finances of the retail investor, barring the increase in deduction limits on loans taken for purchasing affordable homes. Here are five critical points that were overlooked.
No increase in the 80 C limit
The Section 80C limit was last increased from Rs. 1 lakh per annum to Rs. 1.5 lakh per annum, way back in 2014-15. For most individuals with reasonably high incomes and/or a running home loan, this limit is a pittance. Even the CII had recently urged the government to increase the 80C limit to Rs. 2.5 lakhs, in order to reduce tax outgo and divert more retail savings to the capital markets. But alas, the budget contained no mention of any such measure, and the limit was kept unchanged.
Not doing away with the mandated annuity purchase in the NPS
Although the government reformed the NPS to an extent by making 60% of the withdrawal amount tax free, the remaining 40% still requires a mandatory annuity purchase. Anyone with even a cursory amount of knowledge of how insurance plans work, will know that annuities provide a best-case yield of barely 6-7% per annum, with the returns being taxable to boot. In order to make the NPS more effective, the government should have considered doing away with the mandated annuity purchase at the end of the term.
No addition of fixed income tax saving mutual funds
In a clear effort to bolster its aggressive disinvestment plan, the government has called for CPSE ETF’s that (along the lines of ELSS funds) qualify for a Section 80C deduction. While this move would certainly divert retail savings into CPSE ETF’s, it also increases the risk of uninformed investors jumping into these schemes with the false notion that they are “government backed, hence safe”. In fact, it’s a bit unfair that the only kind of mutual fund that’s available under Section 80C are equity linked, and hence high risk in nature. The government would have done well to introduce high rated corporate bond funds that would also qualify under Section 80C. These funds would effectively cater to the lower risk segment of tax savers while providing much needed liquidity to the bond market.
No reduction in GST on Term & Health Insurance
The GST on pure risk insurance plans needed a desperate relook. The GST on insurance products is the same as the GST on Alcohol! Pure risk insurance such as term and health are critical pillars of the personal finances of a retail investor, and it’s grossly unfair that they need to pay inflated prices of 18% to get themselves covered. It’s a bit of an irony that despite being an “insurance crazy” nation, most of us are under-covered on the life and well as medical fronts. Doing away with GST on pure risk policies would certainly have provided a much-needed fillip to these products, but the government failed to take this point into consideration.
No measures on removing the tax arbitrage between ULIP’s and Mutual Funds
A final point that needed a desperate re-look was the long-term capital gains on equity mutual funds. Reintroduced in 2018, the LTCG on profits earned on equity oriented mutual funds created an unfair tax arbitrage between them and ULIP’s (whose proceeds are still tax free). The government should have either rolled back the LTCG on equity mutual funds or introduced a similar clause for ULIP’s, but to have two separate taxation norms for the same asset class, basis the vehicle they are housed under, seems to be quite absurd. If this is not addressed quickly, we may well have another era of horribly mis-sold ULIP’s in the offing.