Union Budget 2022: The current office of the Finance Ministry has quite a stellar record in keeping the common Indian’s spirit upbeat while not veering towards fiscal imprudence. This time won’t be any different.
It is almost every year that the Ministry of Finance needs to pull off a tight-rope walk balancing expectations and responsibilities on either end. This year is no different. If nothing, the pandemic has only made things tougher – imagine walking across a loosely tied rope instead.
Headline metrics like the GDP growth rate point north with World Bank projecting an 8.3 percent growth in FY22 and 8.7 percent in FY23. However, a closer look at the data would reveal that most good-looking metrics are aided by a favourable base. It is important to acknowledge that India is on a path of strong economic recovery with emphasis on the use of ‘recovery’ instead of ‘growth’. The economy is recuperating in parts from the pandemic-inflicted injuries, but there’s still some miles to go before full recovery is achieved and the super-growth cycle kicks off.
The foreword is to set the tone and moderate the common Indian’s forever expectation of having more money in the hand. The current office of the Finance Ministry has quite a stellar record in keeping the common Indian’s spirit upbeat while not veering towards fiscal imprudence. This time won’t be any different.
It is almost imperative that the budget will focus on key macro-economic tenets of employment, public health, MSME development, industrial expansion and aggregate demand generation. While most policies will unknot supply challenges, the equilibrium will rely on how healthy is the demand response. At a very distilled level, this will be driven by relatively micro factors of income per capita and consumer confidence.
It sure is fun for professionals to pen really long essays on pruning techniques and its impact on the tree’s aesthetic appeal. However, there’s very little that most understand about seeds, manure and water. National finance is a derivative of aggregate personal finance.
I understand personal finance is a tricky slope from a budget standpoint, but I have a couple of expectations from the budget and each with good reason. This is closer to a reasonable wishlist backed by elementary econometrics.
It is understandable that the administration will have to increasingly rely on tax receipts given the heavy dose of capex that the economy has been craving.
While trimming of effective tax rates seem to be a reasonable ask, the timing makes it sound ignorant and insensitive. Instead, a middle ground in the form of enhanced breaks should be a step in the right direction with relatively lesser collateral damage to the fiscal while incentivising compliance.
Section 80C allows for a deduction of up to Rs 1.5 lakh in a financial year. This is by far the most popular deductible offered to the general public with the limits raised in the budget of 2014 from Rs 1 lakh.
A simple glance at World Bank’s data on India’s Gross National Income per capita (adjusted for Purchasing Power Parity in $, because why not be more cautious with estimates) reveals an increment of 25 percent over 2014 levels. At the same time, inflation has also raised the cost of living significantly in absolute rupee terms versus 2014. Will spare the details; everyone seems to already know the devil that inflation is. Long story short, deductions applicable in 2014 is insufficient in today’s context and an increase in the overall limit to at least Rs 2.5 lakh is warranted. No math here, it just should be meaningfully higher.
Section 80C includes popular investment instruments like ELSS mutual funds and contributions to EPF, PPF, 5-Year Bank FDs along with life insurance premium. Along with mobilising financial assets, it also encourages formation of real assets through deductions offered for repayment of housing loan principal amount, stamp duty and registration charges.
An expansion in the 80C deductible bracket will not only incentivise financialisation of assets and renewed appetite for real estate but will also alleviate inflationary pressure. Incremental attribution towards 80C line items will also bolster underlying industries associated with financial markets and real estate; both critical to macro-economic agenda items of public expenditure and employment.
Housing for all
While the Prime Minister has been highly vocal about his ‘housing for all’ vision and has been relying on the Pradhan Mantri Awas Yojana (PMAY) to realise the same. The success of PMAY has been somewhat dismal so far with only around 45 percent of urban targets being achieved and the target of building 2.95 affordable houses in the rural segment being extended to 2024 from 2022.
Now, the jury is still out on what proportions of the blame should be pinned onto the administration’s effectives versus the pandemic but that’s a discussion for another day. The critical elements of the PMAY include the inclusion of rental housing, home ownership and tax sops to incentivise house purchases.
Section 24 and 80EEA
Post-pandemic, developers are reeling under pressure from thin margins, expensive commodities and the cost of lost time. Though there are signs of an uptick in demand for houses, it is far from ideal. With a large part of urban unsold inventories belonging to the premium and luxury segments, it is critical that buyers are further nudged into making the decision. Given this background, the current deductible Rs 2 lakh on housing loan interest under section 24 and incremental deduction of Rs 1,50,000 under section 80EEA is grossly insufficient.
To offer further context, consider the fact that a Rs 1 crore loan availed for a period of 20 years at an effective rate of 7 percent per annum will require the buyer to shell out Rs 6.9 lakh in the first year itself as interest payment only.
Keeping pace with developing economics and the administration’s focus on real(i)ty, we can expect the limit for deduction of interest on housing loan to be expanded to at least Rs 5 lakh for the Financial Year through a combination of enhancements in sections 24 and 80EE/EEA. If the administration is feeling too generous, inclusion of such housing loan interest repayment under the new concessional tax regime would be thoroughly appreciated.
It is a less known fact that though investments in the National Pension System is deductible under section 80C, section 80 CCD(1B) provides for an additional deduction of up to Rs 50,000 exclusively for such an investment. This amendment was motivated by recognising the need to incentivise long-term, retirement-oriented investing culture among individuals.
A similar introduction of additional eligible deduction on principal or interest payments on housing loans will be a strong proposition for prospective home buyers.
The administration’s focus on rental housing clubbed with the appetite for rental housing paves way for an inclusion of house rent as an eligible deduction under the new concessional tax regime.
The standard deduction, currently pegged at Rs 50,000, was introduced with an objective to simplify by replacing complex clauses around medical expense and transport reimbursements while offering support to cover expenses incurred as incidental to employment.
If the spirit of the deduction is to be considered as true motive, now is a good time to revisit the limits. Considering the employment situation under pressure along with messed up household budgets courtesy pandemic-induced Work From Home, hygiene expenses, preventive healthcare bills and general inflation, an upward revision in standard deduction limits is warranted. Hoping for an inclusion of standard deduction, current or upward revised, as eligible under the new concessional tax regime may be borderline wishful – but at this point, what isn’t?
Many from the industry continue to build cases on how the budget needs to address taxation disparity between insurer-issued annuity/pension products versus other capital-market linked products like NPS, mutual funds and similar. The fact that insurers are fighting to be treated as investment managers and an equal to the incumbents is an amusing plot that deserves a separate story.
Now, getting to what really matters. The pandemic has propelled Indians years ahead into personal finance maturity. While the effect is blatantly visible in terms of incremental retail participation in capital markets, the large-scale surge in awareness and adoption of insurance is lesser known. This is true for life as well as health insurance.
80D: Health Insurance & Preventive Health Checkup
Health insurance premium of up to Rs 25,000 for self, spouse and children cumulatively is deductible under section 80D. This deduction was introduced in 2015. Considering a simple annual healthcare inflation of 10 percent would warrant a revision of this limit to almost double.
A very recent excerpt from a SecureNow report reflected that the average premium for a variety of health insurance products was significantly higher than the eligible deduction.
While I don’t greatly appreciate data stories that quote averages, what caught me off-guard is that most product cases considered in this were family floaters with a cover of Rs 10 lakh. Considering healthcare expenditure, inflation and increased range of services I can only imagine the need for a larger cover. It doesn’t take an actuary to recognise that the deduction limit is insufficient for adequate cover and may offer a perverse incentive for insurance buyers to make decisions basis affordability of premium more than actual cover needed.
With rising healthcare costs and need for active preventive health checkups, the included sub-limit of Rs 5,000 for preventive health checks is also too low. Think about how much would a routine preventive RT-PCR test and annual general check-up cost for you and family.
GST on health insurance policies
The industry as well as policy-buyers are pained by the heavy 18 percent GST applicable on health insurance policies. Considering people have only started getting serious about the need for health insurance, adequate cover through social schemes are virtually absent and that a healthy insurance coverage is critical to public welfare, an 18 percent rate is far too rich; almost as if built for the rich. Imagine living in a world where movie tickets worth less than Rs 100 is subject to 12 percent GST but health insurance attracts 18 percent GST!
Obviously, this needs to be revisited. Also, it would be great to have concessional GST rates on small-ticket, need-based insurance products ensuring higher insurance coverage.
Life insurance premium
Just like the case with health insurance, pure life insurance plans like term insurance should come along with an enhanced tax break. Right now life insurance premium is included within section 80C, which we know is already inadequate. Perhaps an additional deduction exclusively for no-frills term insurance products could go a long way in contributing to financial security of families as well as increasing the coverage.
While these items don’t sound as fancy as most of the words used in the budget speech, I am confident that the measures will not just help personal finances of the common Indian, but will also aggregate up to healthier national finance and welfare.
The author is Nirav Karkera, Head of Research, Fisdom
Views are personal
(Edited by : Aditi Gautam)
First Published: IST