What Individuals And Investors Want

When the Indian market and its economy have been swirling erratically within the global economic downdrafts and stressed by depressed sentiment, many individuals, investors, households, analysts and corporate head honchos are divided squarely about what could break through, come Budget Day.

In the works at present, Budget 2016 never had a narrower ledge to traverse, balancing delicately between raising revenues and keeping taxes low, between increasing spending on infrastructure and reducing deficits, between setting the economy back on the growth path and holding interest rates low.

As the finance minister puts the final touches to the much-awaited annual exercise, expectations of people, ranging from families wanting to buy a new roof to individuals seeking to fix the gaping fund requirements in their retirement plans, from Budget 2016 are soaring.

Chartered accountant Sunil Modi says he’s concerned about rising household expenses, which leave hardly any room to save and invest. “If conditions have to improve, people need more money in their hands, a propensity to save, and multiple incentives to invest and save taxes.”

There’s perhaps no more clamorous demand, as far as individuals go, than to raise the tax slabs. For households, that’s the base requirement. The present tax bracket has not been adjusted; it’s stuck at Rs 2.5 lakh for the past two years, save for some minor tweaks in exemptions, even as individuals have been ravaged by high and persistent inflation.

Says Modi, “Tax slabs have to be raised, and the basic exemption has to start at Rs 5 lakh, which could be linked to inflation rates, as this would ensure some disposable income in the hands of people; besides it would improve the household spending environment.”

Lower Tax On Stock Options

Along with the “Make in India” and “Startup India” programmes, market experts feel that the government could also encourage talent searches for individuals. One way new companies can find high class talent is through stock options. This tool, however, is taxed in the hands of employees when they exercise the options at market price, which means employees have to pay taxes on stock options received. Experts feel that this should be reversed to the earlier days, when stock options were taxed only at the time of sale, and not when exercised. Says Kumar: “Startups need to provide employee incentives to find new talent and stock options are high in importance. If the tax incidence on these options could be levied only when they are sold, it would encourage entrepreneurship.”

As interest rates are declining, senior citizens are a worried bunch as their staple investment the fixed deposit is taxed at normal slab rates in their hands. Says Kuldip Kumar, head personal tax, PwC India: “Senior citizens require a separate deduction of up to Rs 50,000 or one lakh on this income so they don’t feel the pressure of declining interest rates, nor are they in a position to invest in shares or high risk instruments.” Besides, due to higher medical expenses, senior citizens could also benefit with a new exemption on medical expenses incurred by them or their children, say experts.

Next on the wish list of individuals is greater tax incentives for saving and investing. One of the sections that help tax savings the most is Section 80C. This covers a wide gamut of investments such as the interest and principal on housing loans, provident-fund investments, and investment in equity funds, among others. Says Kumar: “Individuals would lile to see an increase in this limit. The opportunities to invest have to increase.”

Salaried individuals also need additional exemptions. Says Dr Suresh Surana, Founder, RSM Astute Consulting Group: “Standard deduction of Rs 25,000 should be revived to ease the tax burden and consolidate multiple trivial exemptions.”

Besides, Kumar says the stress levels of individuals have increased in the recent times; hence, the block of exemption on leave-travel allowance, which is availed of twice every four years, has to be increased to one each year.“ These days with high stress levels and higher costs of travel, there is the need for further exemption here,” avers Kumar.

TOP WISHLIST All eyes are on finance minister Arun Jaitely. Here’s what is expected from him and Budget 2016

1 Increase the investment saving limit under Section 80C with additional limits for mutual funds and pensions to Rs 3 lakh per annum 2 Higher tax-breaks on medical reimbursements due to the rising costs of treatment for senior citizens 3 Deductions on on 80D Mediclaim insurance payments be made as per actual payments, and not limited to Rs 15,000 4 Roll back taxation of the capital-gains time-frame on debt investments to one year against the present three years 5 Enhance leave-travel-allowance exemptions to each year, against the present twice in a block of four years 6 Tax deductions on account of interest payments on housing loans could be enhanced from the present limit to encourage housing for all 7 Special increase in income-tax slabs for senior citizens and an increase in exemption limits on income from fixed deposits, a staple investment of senior citizens 8 Status quo as far as taxes on equity and equity mutual funds are concerned, but additional incentives to be given to encourage financial savings 9 Service tax on insurance premiums could be done away with, and special incentives to encourage insurance and financial inclusion 10 Service tax exemption limit could be increased Rs 25 lakh or more from the present limit of Rs 10 lakh

Additional Tax Sops
The next important area that calls for incentives is financial savings, particularly as infrastructure investments and initiatives such as Make in India require all the capital they can attract. Budget 2016 has the indubitable task of lifting financial savings, which ultimately are — directly or indirectly — channelled into capital markets in due course.

Incentives to encourage the financial-savings culture in the country are needed to wean investors away from physical assets such as gold. Says Rajnish Narula, CEO, Canara Robeco MF: “Budget 2016 should incentivise investors (retail and institutional) to invest through mutual funds. This would channel long-term savings into equity and debt markets, providing the much-needed fillip to capital for India’s growth.”

The rout in the equity markets lately has been blamed on international events such as falling oil prices. A strong domestic mutual-fund sector, especially robust domestic inflows, could counter the volatility of foreign inflows. Here, experts say Budget 2016 should pave the way for greater domestic participation. “The endeavour should be to increase retail savings in the capital markets to provide a solid base so as to negate volatility associated with FII flows,” says Narula.

On the tax front, the Budget 2016 is not expected to tinker with the structure of mutual-fund taxation, which means “status quo” as far as your taxes are concerned. The present advantage to fund investors is that equity mutual funds are tax free if investments are held for over a year. Of course, investors are paying a standard transaction tax, but that does not affect funds in the hands of investors.

A call to allow additional tax-savings benefits on equity-linked savings schemes (ELSS) is gaining momentum day by day. Investors would benefit if ELSS comes under an additional exemption limit over and above the present one under Section 80C, according to some fund houses.

If Budget 2016 does introduce a separate additional limit, it would signal that the government is willing to provide savings in financial assets, particularly in equities and risk-assets, with yet another trigger. This would spur investment in infrastructure; and deepen and widen the penetration of the equity culture.

Debt funds could do with a similar tax status as for equity funds, given that debt is no less volatile, and that investment in infrastructure is largely done through debt. Debt funds attract long-term capital-gains tax on investments held for over three years.

Status Quo
As far as capital markets go, they are the financial barometer of the strength of the domestic economy. That is why many investors are worried about whether Budget 2016 will tinker with the present tax structure of equity investments, such as a re-introduction of the long-term capital-gains tax. At present, there is no long-term capital-gains tax on equity investments for over a year. Markets are also looking for some incentives for infrastructure investment.
While a phased reduction in corporate tax is welcome (since it raises shareholder earnings), the plan to cut back on corporate exemptions is being looked at with circumspection.

Corporate exemptions provide net relief on taxes, helping reduce the tax burden. In the last budget, FM Arun Jaitley spelled out a plan to cut corporate taxes to 25 percent, and concurrently reduce and eliminate corporate tax-exemptions. A drastic change in these laws could alter the net earnings per share of firms, so watch it.

Rationalised Structure
With the real-estate sector facing a dropdown for a long time, the dream of “housing for all” may fade into frustration if housing does not pick up, according to real-estate watchers. The sector is calling for more tax incentives for individuals in order to drive purchases of homes. The biggest one is perhaps raising the deduction on interest paid, from the present Rs 2 lakh to a higher limit, as property is considerably pricier in big cities.

An extension to the housing-loan exemption limit for under-construction property delayed beyond three years could also help. At present, a deduction of Rs 30,000 on interest paid is allowed if construction is not completed within deadline. Where construction is completed within three years, the deduction is Rs 2 lakh.

Experts want Budget 2016 to provide the same deduction even for projects that are completed after three years so as to reduce the costs for borrowers, who are also paying rent. Says Anuj Puri, president and country head, Jones Lang LaSalle India, a property consultant firm: “Instead of allowing home-buyers tax benefits post-possession, the Union Budget should make a provision that allows these from the time they start paying interest on housing loans.”

Penetration Incentives
If there’s anything that insurance lacks it’s more schemes that encourage financial inclusion. Says Sanjay Dutta, chief underwriting and claims, ICICI Lombard General Insurance: “We need more schemes that bring in financial inclusion such as the Jan Dhan Yojana and the Prime Minister’s Bima Yojana. Having adequate coverage is the need of the hour, not only on homes, but also for cars and health insurance, among others.”

Also, individuals are impacted by the imposition of a service tax on insurance premiums. Experts point out that Budget 2016 must do away with this anomaly. Says Subrat Mohanty, head of marketing, Bajaj Allianz Life Insurance, “Insurance provides a vital service, and hence there should be no service tax on the premiums paid. Individuals also get confused when their premiums are rising because of this tax.”

Waiting And Hoping
There is hardly any evidence that the FM has fiscal leeway to create the necessary space on individual taxation. First, the government has been raising taxes on oil and petroleum products and attempting to bridge the gaping revenue deficit. Second, infrastructure is one area that also needs the Budget’s attention in a huge manner.

If the FM does find room to wiggle in all of the demands, that would be a bonus. But even if some of the tax anomalies can be streamlined and individual taxes reduced, which can be channelled to savings, Jaitley would have pulled the proverbial rabbit out of the hat to the plaudits of an appreciative audience.

clifford.alvares@gmail.com