Thursday, June 26, 2014

Remove anomalies, update taxation of pension, insurance & savings.

Remove anomalies, update taxation of pension, insurance & savings. 
Budget time sets off a queue at the FM’s door for tax reliefs and benefits. While the FM can give tax relief to tax payers, poor perhaps need to be motivated directly as they are not in the tax bracket. 
One easy pick for the FM this year could be the NPS Swawalamban benefit - this is fast receding in its 'value' and for those joining in FY 14-15 would only be available for 3 years. 
The FM should extend this to 5 years to FY 18-19. Importantly, the annual co-contribution benefit of Rs 1000 was announced in 2010 and should now be increased.
With over 2.6 million NPS lite accounts, the FM should encourage focus on getting persistent savings outcomes. He could keep the eligibility levels at minimum Rs 1000 savings for the workers to get the Rs 1000 co-contribution but increase the matching co-contribution limit to at-least Rs 2400 pa (that’s just Rs 200 per month).  
He could consider also expanding the Jana Shree Bima Yojanan (JBY) and bundle it with NPS lite and subsidize the Rs 200 premium fully for the subscriber. JBY offers a sum assured of Rs 30,000 on natural death and higher compensation in case of disability or accidental death. The JBY cover could be made contingent on the subscriber contributing at-least Rs 1000 in the scheme in the previous financial year and should be made available to the worker for the full duration of the NPS lite scheme.  The annual insurance cover could help encourage persistent savings.
Encouraging low-income informal sector workers to save for their old age is probably the most challenging financial inclusion initiative. Promising matching contribution is a fair bet to motivate workers to save for their old age and is better than many other subsidies that may not create any lasting value. The FM should give it the required push and encourage savings by low income workers.
In this context, it might also be useful to relaunch the inflation index bonds in a retail format which are suitable for the low income workers and middle class in general. The bonds in their current form have failed to serve this purpose and failed. This will require some thinking and the usual approach of coming up with clever and complex stuff which no one might buy needs to be avoided.
Coming to the taxpayers, a person who was earning an annual income of Rs 5 lakhs nine years ago in year 2005 should today be earning Rs 9-11 lakhs pa, just assuming an 8-10% annual increment to keep up with inflation. 
However, the deduction available for investments under section 80C of income tax is stagnant at Rs 100,000 as was prescribed in 2005.  
If the FM were not to offer any real increase in the deduction but just update the limit for consumer price inflation, say at an average of 7.5%, it would need to be pegged at Rs 200,000 to represent the same value it did in 2005. 
The FM could however think of providing some real increase and peg the limit at Rs 250,000, which would make it aligned to about 10% year on year increase since 2005. 
The FM should accordingly review the list of eligible investments and make the sub sub-limits also meaningful. After all, the amount each of us can save would depend more on our income than the upper limit for availing the tax deduction. While at it, It makes sense to link this ceiling to the cost inflation index so that the FM could spare himself the task of updating this amount every year unless he wants to make a policy level intervention.
One important anomaly that the FM should set right is to bring NPS and pension plans under MF to the same footing as PPF and EPF, which are tax exempt on withdrawals. It would be worthwhile to make all long-term savings and pension scheme (and infra bonds) of 15 years and above exempt from tax at all stages. This could nudge the taxpayers to put away the much-needed sums for later. 

Well these are perhaps small tweaks here and there and the FM has many other big things to mind, perhaps there is no money to spare for increasing tax deductions and making long term savings and pension attractive. 

But then, even a housewife finds the money and method to do things which are important and required for her household. The FM surely would agree and perhaps deliver more than we expect.