Budget 2017 – Investors look to higher 80C limit – Tax breaks for Pension Products.

Budget 2017 – Investors look to higher 80C limit – Tax breaks for Pension Products.

A volatile stock market and falling interest rates conspired to make 2016 a bumpy year for investors. The investment industry is thus expecting a bunch of sops from Budget 2017.

80C limit –  Under present tax laws, investors are expected to squeeze almost all of their investment allocations for the year within the Rs.1.5 lakh limit under section 80C (with NPS alone eligible for an additional Rs.50,000 tax break under 80CCD). But as this is woefully inadequate, tax consultants expect that the section 80C limit could be lifted from Rs.1.5 lakh to Rs.2 lakh. If this is done, you may be able to up your savings while lowering your tax outgo.

Bank deposits – Bankers have for long been demanding that the lock-in period for tax saving deposits be reduced from five years to three years, for parity with mutual funds. This year, a special bank deposit for senior citizens offering a fixed interest rate of 8 per cent for a 10-year lock-in was also announced in the Prime Minister’s year-end speech.

But the Cabinet has approved the launch of Varishtha Pension Bima Yojana 2017 by LIC just last week, with an 8 per cent guaranteed return for 10 years. Therefore, it isn’t clear if the 10-year bank deposit with an 8 per cent assured return is still in the offing.

Insurance – Unhappy to jostle with other investment vehicles, the insurance industry is demanding a separate carve-out under section 80C for life insurance premia. The industry is also keen that the retirement and pension products offered by it be given the additional tax breaks given to NPS. There’s also a demand for exempting annuity income earned by senior citizens from income tax.

It is now taxed at the slab rate. In a separate wishlist, health insurers are demanding that the tax exemption towards health insurance premium be doubled from Rs.25,000, under section 80D. The insurance industry also hopes that, with the introduction of GST, all insurance premia will be subject to a merit GST rate of 5 per cent instead of the present service tax of 15 per cent.

Mutual funds – The mutual fund industry has four demands from the Finance Minister. One, it is hoping that fund-of-funds investing in equity schemes will be given the same tax breaks as equity MFs, and not be treated as debt MFs for tax purposes. Two, there’s a demand that the period for levy of long-term capital gains tax on debt MFs be reduced again, from 36 months to 12 months. This will reduce the tax outgo for debt fund investors with holding periods of two and three years. Three, there’s a demand for the Rajiv Gandhi Equity Savings Scheme to be opened up to higher income investors (currently for annual income up to Rs.12 lakh).

Finally, there’s a demand to allow MFs to float retirement vehicles on the lines of 401k plans in the US. 401K plans work much like the NPS — they offer three or four different portfolios with varying allocations between equity and debt, for investors to save towards retirement. If this proposal is accepted, along with a government-run retirement vehicle like the NPS, you would have a choice of putting your money in a range of market-linked retirement plans managed by different fund houses.

Equities – This isn’t on any industry wishlist. But after Prime Minister Modi’s recent statement that capital market players should make a bigger contribution to the exchequer, there has been speculation that big tweaks may be in the offing, on the entire capital gains tax regime for equities and equity MFs.

This could include the Budget 2017 levying a higher rate of short-term capital gains tax on equities (currently a flat 15 per cent), stretching the definition of ‘long term’ for equities to 36 months (now 12 months) and the levy of long-term capital gains tax on equity gains (now tax-free) at a modest rate of, say, 10 per cent.

All this isn’t necessarily bad news for equity investors. A holding period of three years is often essential to make a decent return from equities. And the imposition of capital gains tax could mean the removal of Securities Transaction Tax (STT). Remember, you pay STT on all your stock market trades, irrespective of whether you make a profit or loss. With capital gains tax you pay tax only in the case of profits.

A long-term capital gains tax on equities/MFs would also mean that you will be eligible to carry forward and set off any losses from your equity investments in future years. This isn’t allowed today because long-term gains are tax-free. STT also takes a big bite out of short-term traders’ profits, so removing it could lift both market volumes and liquidity in the smaller stocks.

Source: BL