A Damp Squib?

Investors who bravely sat through the longest ever budget speech on a Saturday morning mostly walked away disappointed; it turned out to be a damp squib for the average Indian’s personal finances.

The excitement on the bourses was palpable in the two hours preceding the start of the Finance Minister’s budget speech, as #budget2020 was being touted by many as the ‘saviour’ of the rapidly slowing domestic growth story, one that would kick-start the juggernaut that is the Indian economy by bringing about big-bang measures to put more money in the hands of the people and turn the faltering consumption cycle on its head in one fell swoop. Come the closing bell, and the bellwether Nifty index had cracked 300 points, the Bank Nifty a whopping 1,000 points, and mid-caps 3 per cent.

While the budget has, in a sense, put more money in the hands of some taxpayers by rejigging tax slabs, the removal of deductions has really made it no more than a quid pro quo sort of arrangement. In other words, to enjoy the benefits of the new slabs one would have to give up all deductions — from the coveted Section 80C on ELSS and insurance premiums, to Section 24 deductions on home loan interest. For an individual maxing out her deductions every year, it makes little sense to migrate to the new structure — financially speaking. A back of the envelope calculation would tell you that for an individual who even contributes fully to Sections 80C and 80D every year, there’s no incentive to switch unless his income is close to Rs 10 lakh per annum — and the ‘benefit’ is really just a pittance unless you’re earning closer to Rs 15 lakh per annum. One also cannot discount the positive impact of well-planned savings that are motivated by the desire to reduce one’s tax burden. This will diminish going forward, much to the detriment of the average Indian’s long-term savings portfolio.

A redeeming feature that could have emerged from this whole rigmarole is that if the new ‘sans exemption’ regime is widely adopted, it would put a virtual full stop to the pernicious habit of shovelling hard-won yearend savings into fruitless traditional life insurance policies goaded by pushy sales people positioning insurance as little more than an avenue to save taxes. Any person associated with the financial services business will be well aware of the infamous ‘JFM’ push to snare investors into locked-in, low-return life insurance plans with the two magic words — Tax, and Saving! Not surprisingly, listed life insurers ended the trading session between 4.7 per cent and 10.9 per cent lower.

DDT abolition
While the abolition of DDT (dividend distribution taxes) is, in fact, a welcome move, that the dividends itself will now be taxed at the margin does take the sheen off to an extent. For an equity mutual fund investor in the highest tax bracket, dividends just became more expensive. For a debt mutual fund investor, the benefits of this change would mainly accrue to investors in the lower tax brackets. Nonetheless, this does have benefits for foreign portfolio investors, which could have a net positive impact on the capital markets in the long run. 

What would have been terrific, however, is abolition of LTCG tax on equities; which made an unwelcome return in 2018 after a gap of 14 years, and has added precious little incremental value to the exchequer. It’s an open secret that tax efficiency continues to be a key driver of investment decisions by most retail investors; and in an environment where investors are becoming increasingly risk averse and the mutual fund industry’s SIP book is reaching a veritable standstill, the abolition of LTCG tax would have gone a long way in harnessing household savings to power the capital markets ahead.

Quite strangely, Budget 2020 saw no white knight coming through for the current mess that is housing. The widely expected increase in the Section 24 rebate limit could have kick-started demand for housing to a degree, especially in the affordable and mid-segment categories. After all, the glut of unsold inventory remains a very key issue that the industry has now grappled with for years.

While this was a balanced budget with no terrible negative surprises and a clear focus on socio-economic issues, there was precious little in it to buoy one’s personal finances and drive investor behaviour in the right direction.