Budget 2017 should be about changing India to a country of investors

The countdown to Budget 2017 has begun. The date is February 1, in a departure from the February 28 date being followed for decades. It is the PM Modi-led NDA government's fourth budget, including one that had to be presented within a couple of months of taking charge. It also marks the mid-term of the government that rode to a massive victory in what was dubbed as India's first Economy Election in 2014.

The ride to budget day has got off to a rather unpleasant start. PM Modi at a recent SEBI event said it is time for investors in stock markets to contribute more toward taxes. It was read as him indicating a long-term capital gains tax on equities (currently gains made on equity investments beyond 12 months are tax free) and to prevent a crash the next trading day, finance minister Arun Jaitley had to make a statement that such a proposal is not being considered. In other words, the FM was forced to say what will not be in the budget, an otherwise highly secret exercise.

This year's budget comes in the wake of a sledgehammer in the form of demonetisation in November 2016 — a shift from cash to a cashless economy. Interest rates are expected to come down in the early half of 2017. Provident fund rates have already fallen and other government savings schemes will follow suit for sure. In other words, if you are a saver, your returns are falling.

It is the right time for the government to propel Indians toward investing if it wants to lift a larger number of people out of low income and control its ballooning pension costs — the government pays as much in pensions as it does on salaries to its employees.

Here are some suggestions:

1) Do not tinker around with long-term capital gains tax on equities. The government must realise that despite it being zero beyond 12 months, we never saw Indians investing in equity for the long-term. Estimates put the equity penetration at between 3 per cent and 5 per cent.

It is only in the past two years or so that retail investors have started coming to the stock markets in a meaningful way, thanks to the popularity of systematic investment plans or SIPs of mutual funds. It is just the beginning. Rather than allowing the momentum to pick up further, any change at this time will only push investors back to bank deposits and government-guaranteed schemes.

Last year, there was a buzz that the government was planning to make the long-term period to three years instead of one. It did not go ahead with this. Even if this is back on the table this year, it must ensure this is applicable only to investments made post April 1, 2017, and not to existing investments. PM Modi's statement has already spooked investors who fear they will now be taxed on their existing gains built over the years, and are asking their financial planners if they should sell their existing holdings.

The government must ensure its decision is prospective and that existing investments will not be affected else it will sink the stock markets and retail investors who have come with a lot of effort will flee. In fact, the government should announce a national financial literacy mission to educate Indians on the merits of investing.

2) Bring NPS or National Pension Scheme on a par with other long-term investment schemes like PF, PPF and ELSS in terms of tax. For reasons best known to successive governments, NPS is less tax-friendly than long-term investments it is meant to compete with. In fact, it was created to solve India's pension problem.

It is market-linked and is the lowest cost financial product. But yet, no one is buying it simply because it is not tax-friendly. The government should encourage NPS if it wants to attract small investors to invest for their retirement through market-linked instruments.

Last year's budget did give an additional Rs 50,000 benefit at the entry stage (in addition to the Rs 1.50 lakh benefit under Section 80C), but the gains made after years of accumulation are still not tax free, unlike in other similar products. This needs to change.

3) The UPA 2 government had launched the Rajiv Gandhi Equity Savings Scheme to encourage investments in equity markets. It was a convoluted scheme and a disaster even though the principle was sound. The government should scrap this scheme and come up with a simple one.

Give a tax benefit on every equity investment made with a three-year lock-in. To encourage only retail investors, there could be a cap on the limit invested. For starters, allow this only for equity mutual funds and not direct equity shares.

4) Revamp Section 80C. This section that provides an Rs 1.50 lakh tax deduction is an amalgamation of all kinds of investment and expenditure. It includes children's school fees and investment products like PPF and Equity Linked Savings Scheme and insurance products.

The government should segregate expenditure-related sops and park them in another section if it so chooses. Expand the amount to Rs 2 lakh and include only investments. Not fees and home loan repayments.

5) India is a highly under-insured society. While the Modi-led government has already enhanced tax sops for health insurance, it needs to do the same for term insurance. This is the real insurance. While the sops currently club investment and term plans, it needs to segregate these.

The focus has to be on getting people to take more of term insurance and not merely end up investing large sums in ULIPs and endowment plans.

(The article first appeared here.)

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