Budget 2021 expectations: How to encourage investments
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
The role of savings and investments as vital to accelerate economic growth in India has received considerable attention over the past few years. In fact, since the inception of economic planning in India, the emphasis has been on saving and investment as the primary instruments of economic growth and an increase in national income.
The role of savings and investments in accelerating economic growth in India has received considerable attention over the past few years. In fact, since the inception of economic planning in India, the emphasis has been on saving and investment as the primary instruments of economic growth and an increase in national income.
However, the current investment market conditions in India such as the low fixed deposit interest rates offered and high long term-capital gains tax rate has created an uninviting environment for direct investments and has led small investors to look at other avenues for earning returns (such as equity and mutual funds). This coupled with the market volatility caused by COVID-19, continues to hamper the investment market with scarce liquidity and the weak earnings outlook.
With Union Budget 2021 just around the corner, Finance Minister Nirmala Sitharaman could consider introducing certain fiscal and monetary policies to promote macroeconomic stability by incentivising investments to normalise liquidity levels. Tax incentives have traditionally been used by various governments as tools to promote an economic goal. It is understood that tax, investment and economic growth go hand in hand, as justified by the two fundamental premises that (a) tax breaks/incentives stimulate additional investment; and (b) such additional investments lead to faster economic growth and higher standards of living.
In this regard, the Finance Minister may consider the following recommendations for encouraging investments:
Key recommendations for Union Budget 2021
1) Issuance of bonds with a higher interest rate for individuals
Given the low-interest rate for FDs, investors, especially senior citizens are facing significant challenges. The government should consider issuance of retail bonds (with an upper limit of investment per retail investor), with a higher floating rate compared to market rates.
2) Investment in Public Provident Fund (PPF) and corresponding deduction allowable
While taxpayers in employment have a compulsory savings of 12 percent of their salary in the provident fund (PF), investment in PPF is the only tax-efficient saving option available for a self-employed taxpayer. Further, the interest rate offered on investment in PPF is significantly higher as compared to FDs. The annual limit for contribution to PPF is capped at Rs 1,50,000 and has not been increased in several years. The government should consider increasing this limit to at least Rs 3,00,000. This is likely to boost domestic savings as a percentage of GDP and will have an anti-inflationary impact.
Further, the present limit of deduction allowable under section 80C of the Income-tax Act, 1961 (‘Act’) of Rs 1,50,000, has not been increased for several years and also requires reconsideration. The government should consider increasing the deduction limit to Rs 3,00,000 to provide investment as well as savings opportunities to the public at large, which is also necessary for keeping in view the rate of inflation.
3) Expanding the scope of deduction allowable for National Pension Scheme (NPS)
Pension received from NPS by way of annuity is taxable, which is not in parity with other pension schemes such as PF. Given that NPS is positioned as an alternative to PF, individuals are not very keen in contributing to NPS. To bring in parity and incentivise employees to be a part of NPS, the government should consider exempting the annuity receivable from NPS.
4) Deduction for interest earned on FDs
Individuals, other than senior citizens are eligible to a deduction of up to Rs 10,000 against interest earned on the savings account. In order to incentivise investments in FDs, the government should consider providing an additional deduction of up to Rs 50,000 against interest earned on FDs.
5) Reduction in the capital gains tax rate
Capital gains tax on short term investments is taxed at slab rates for individuals whereas gains on long term investments is taxed at 20 percent. In order to incentivise long term investments, the government should consider reducing the capital gains tax on long term investments to 10 percent in line with the tax rate for listed equity shares.
In addition to the above, the government may also consider providing incentives for encouraging investments in specific sectors, that would in help impacted business recover and boost growth:
a) Agriculture sector
Agriculture is a critical sector for the Indian economy, in lieu of its significant contribution to GDP and employment statistics. One of the key challenges that the agriculture sector faces today is of Agri credit.
The government should consider introducing a separate tax deduction scheme (similar to the existing scheme for PPF) to incentivise private investments in this sector. This will help the government raise requisite funds to provide affordable credit/finance to the farmers and boost the growth of this sector.
b) Real-estate sector
The real estate sector is labour intensive and has the potential to trigger demand revival of other sectors of the economy such as cement and steel.
The government should consider introducing a separate annual deduction of Rs 150,000 for principal repayment of pre-existing housing loans, which will provide the much-needed fillip to housing sales.
For individuals purchasing a new house, the government should consider allowing the entire amount of interest and principal paid during the year as a deduction from income. This will provide a fillip to the ailing real estate sector, clear up inventories and improve credit offtake of banks.
The author is Rajesh H Gandhi. Partner at Deloitte Haskins and Sells LLP. Views are personalÂ
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