This is the time of year when various people write their letters to Santa, asking for the presents they want. Of course, since Christmas is already over, I am in fact talking about the Union’s budget and the demands that are made of the Minister of Finance. Some of them are various industries and sectors that want part of their deal, so to speak, to be changed, even though in the GST system only non-tax matters are addressed in the budget. Then there’s the media, which includes people like me, who want something or the other done for a segment of the population.
Last year there was none of that, for obvious reasons. In fact, looking back to January 2021, I notice that in the two decades I started writing about personal finance issues publicly, the last year was the only one where I had next to nothing. to say. In many ways this Union budget takes with it two years of an interrupted programme, although with large parts of the country still under some degree of covid restrictions, we are not yet fully back to the normal.
Anyway, when it comes to the various things the budget can and should do in the area of personal finance, the traditional annual request has been to increase the tax savings limit by 80C. However, in recent years there has been something of a disconnect between the kind of tax savings amounts that matter to the middle class and above and what even sizable increases of 80C can deliver.
Sound strange? Well, look this way. Let’s say the 80°C limit is increased from Rs 1.5 lakh to Rs 1.75 lakh, which is a substantial change. If this happens, even those in the highest tax bracket would see their monthly tax bill drop by only around 700 rupees. For anyone earning more than a lakh a month, that’s not even a noticeable amount. For those in lower tax brackets, the equation is similar, except the investment-to-savings ratio is worse.
So, isn’t an 80C rise irrelevant? Not at all! What you save in 80C comes back to you, with a multiple, a few years later. Not only that, for many people it is a gateway to a lifetime of saving habits.
The real story is that an increase in the Section 80C tax savings limit has a huge downstream impact on people’s lives, which has nothing to do with the tax savings of the current year. Most taxpayers make full use of 80C whenever possible. For many, these investments are made through ELSS funds, which become a gateway to becoming a long-term equity investor. An additional tax saving limit of Rs 25,000 or 50,000 has a huge multiplier effect on the total lifetime savings a saver is likely to achieve, and the obvious follow-on effects on overall comfort and happiness seniors. In fact, to enhance this effect, a much-needed reform of tax savings laws would be to limit Section 80C to savings and investments only. Currently, other non-savings related expenses such as education and term insurance are also grouped in 80C. These should have their own limitations.
The other tax policy hot spot that affects savings and investments is the capital gains tax on long-term savings. Since February 2018, capital gains are taxable at 10% plus a supplement with an annual free limit of Rs 1 lakh of gains. There’s nothing wrong with the tax itself, but unlike long-term capital gains tax on other types of assets, there’s no indexation. A portion of nominal capital gains is consumed by inflation. If you invest in a debt fund, this may be offset, but if you invest in stocks, this is ignored. This is a strange anomaly that needs to be removed. Moreover, the tax exemption limit of Rs 1 lakh should surely be revised upwards. Four years have passed and the real value of this Rs 1 lakh is much lower.
Surely, the purpose of tax investments is not just to grant meaningless tax breaks, but to encourage saving in a way that leads to a real improvement in people’s future and old age. Small anomalies can run counter to these objectives and should be tracked down proactively.
(The author is the founder and CEO of search for value)