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.
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