The Government is set to reduce the interest rates on small savings, which means bankers and savers will now face challenges since there would be lower returns from the currently high yielding Post Office savings schemes, NSC and PPF and other products. With inflation under control at 6% and the interest rates reduced policy makers are looking at reducing lending costs to provide boost to investment.
Investors or savers have been parking money in financial assets with both prices of both gold and real estate being hit. Domestic flows to equities have increased and over the last 20 months, inflows have exceeded the aggregate inflows in the preceding 10 years. The last nne months saw inflows of over Rs 70,000 crore in equity markets and Rs 15,000 crore in the remaining period.
Many investors prefer bank deposits to equity and debt schemes that have better returns. Added to this the Government is keen to push up investment rate to around 38 per cent. Senior citizens who have deposited their entire lives savings in bank term deposits are worried as well. This is the time when investors shift money to other financial assets, banks fear.
These are the few demands investors seek in Budget 2016, to offset the losses for individual savers.
- An increase in the tax deduction limit, from Rs. 1.50 lakh to Rs 2.5 lakh – Rs 3 lakh under 80c of Income Tax Act.
- Tax deduction for interest of above Rs. 50,000 as against Rs. 10,000, currently.
- Bankers have asked the finance ministry to increase the returns of the depositor with inflation-adjusted post tax returns by reducing the lock-in period eligible for tax rebate to one year from five years. Currently, only 5-year term deposits get tax break.
If tax break is allowed for 1 year deposits, more depositors will come into the system. The Government will consider this as the major chunk of this money going into infrastructure financing.
Coming to real estate, experts feel that mutual funds should be included in the list of investment avenues to park real estate sale proceeds. Currently to save capital gains the proceeds are invested only in the bonds of NHAI or REC.
Further, pension regulator, PFRDA, has been asking for tax incentives so that the National Pension Scheme (NPS) can be on par with Employees’ Provident Fund Organisation (EPFO) products. Right now it’s EET (no tax during contribution and accumulation but taxed during withdrawal) for NPS and the PFRDA is batting for EEE (no tax at any of the stages) structure.
Life Insurance Corporation is looking for tax amendment as it has witnessed a 24 per cent fall in premium of sale of policies.
All this, when the government is readying itself to lower corporate tax and eliminate tax breaks. Linking inflation to investment returns has not worked here. There are no benchmarks. With quite a few educated, informed brains in the system, this is a challenging time for the Government to ensure comfortable living to its citizens. Isolating citizens on the social media for statements they make about leaving the country may not work for long. The question is, is the Government doing enough to ensure that its citizens invest, live, bring industry, and do business and thrive in the country. Or is it helping a privileged few? Time for serious thought!