The first budget of Modi 2.0 government primarily focused on stimulating growth, incentivising digital economy and promoting affordable housing. Its proposal to provide additional tax deduction of Rs 1.5 lakh on interest payment of affordable housing loan should revive demand in the housing industry. The decision to recapitalise PSU banks and provide partial credit guarantee to PSU banks to purchase high rated pooled assets of NBFCs will increase liquidity in the NBFC segment and credit flow to the MSMEs.
Here is a list of major hits and misses of Budget 2019:
HITS NPS: Tax-exempt maturity proceeds for all and increased tax deduction for central government employees
With the perspective to enable pensioners to have more disposable income, the budget has notified the earlier Cabinet decision to fully tax-exempt lumpsum withdrawals of NPS maturity proceeds. The proposal was approved by the Union Cabinet in December 2018 but was not notified in the Interim Budget. Additionally, Budget 2019 also provided incentives to central government employees by increasing tax deduction for employer's contribution from the current 10 percent to 14 percent of the salary and by including the employee's contribution to NPS Tier II account under Section 80C.
MSMEs: Higher credit flow
The MSME segment plays a crucial role in the economy by contributing around 29 percent to the GDP and providing employment to around 12 crore people. However, this sector has always been plagued by insufficient credit flow from the banking sector.
While NBFCs were successful to an extent in bridging the gap in the credit supply, the recent liquidity crisis in the NBFC segment have adversely affected their capacity to lend to the MSME sector. This year’s Budget has tried to address this issue through two proposals. First is to inject Rs 70,000 crore as capital in PSU banks and then by providing partial credit guarantee to the PSU banks for purchasing high-rated pooled assets of strong NBFCs.
While the partial credit guarantee will directly improve liquidity of NBFCs, the recapitalisation of PSU banks will increase their capacity to lend to both MSMEs as well as the NBFCs, some of which will flow to the MSMEs as well. Additionally, an interest subvention of 2 percent for all GST registered MSMEs on the fresh and incremental loans will provide a boost to the MSME segment by reducing their credit cost.
Affordable housing: Higher tax deduction to boost demand
Continuing with its aim to achieve the goal of “Housing for all” by the year 2022, Budget 2019 has proposed a major tax benefit for incentivising home buyers in the affordable housing and thereby, revive the demand in the housing sector. As per the proposal, Section 80EEA has been inserted, which will allow an additional deduction of Rs 1.5 lakh on the interest component paid on housing loans priced up to Rs. 45 lakhs. However, this deduction will be available only on housing units purchased from April 2019 to 31st March 2020.
MISSES LTCG tax: Non-exemption of equities and equity mutual funds
Equity market plays a crucial role in capital formation and overall economic development of a country. The erstwhile exemption of LTCG on equities played a crucial role in the deepening our equity market and increasing the retail investor participation in it. Hence, the restoration of tax exemption of LTCG tax on equities would have helped in further increasing the participation of retail investors in equities. Additionally, this would have also brought in tax parity of equity mutual funds with other equity linked instruments, such as NPS and ULIPs, which are still exempt from LTCG tax on equities.
Section 80C: No increase in its upper limit
Section 80C is crowded with numerous mandatory pay outs like children’s tuition fee, home loan principal repayment, life insurance premium, etc. This lead taxpayers to easily breach Rs 1.5 lakh limit, leaving no incentive for taxpayers to save and invest in tax saving FDs, PPF, NPS, ELSS, etc. A higher limit would have provided a strong incentive to the taxpayers to save taxes through long-term investment in financial assets and thereby, enhance their long-term financial security.
Naveen Kukreja is CEO & Co-founder,