Political manifestos suffer from a bias against the problems of the earning, saving, tax paying and investing class. There's no shortage of issues that concern personal finance and savings. Here's our manifesto, a brief list of the most important personal finance issues that any government must tackle if it wants savers and investors to prosper.
Link Inflation to Tax Slabs and Limits
In 2005, the tax saving investments under section 80C were set at Rs. 1 lakh, which is where it remains after almost a decade. The cumulative inflation over this period has been 112 per cent, which means that the limit is now effectively worth just Rs. 47,000. By allowing the limit to fall behind inflation, the government is effectively hiking taxes through the backdoor. The same is true for medical insurance, education loans, house rent and all other exemptions.
The new government should link all slabs to inflation so that inflation doesn't eat into post-tax income by putting ever-higher proportion of our income into its own pocket.
A Cleaned-up Tax Administration
The last two years have seen the most hostile tax administration in years, as an incompetent revenue department sets out to boost revenues by hook or by crook. Lakhs of taxpayers have been hit by absurd tax notices and demands whose sole aim is to boost immediate tax revenues even if they have to be refunded later. Middle class taxpayers have been harassed into paying up taxes not due from them. The new government must clean up the tax administration and enforce an attitudinal change.
For two years, 2011-12 and 2012-13, the government allowed taxpayers with an income below Rs. 5 lakh, entirely from salary, to not file returns. In the first year, the exemption was pretty much useless. Then, the government withdrew this exemption. The new government must bring in a genuinely useful no-returns policy for the bottom two tax brackets.
Quickly Bring in a Simplified DTC
Back in 2009, the government proposed a new Direct Taxes Bill to replace the Income Tax Act. The proposed code was genuinely simpler and fairer. It's main characteristic was a moderate tax regime coupled with almost new exceptions or caveats. This would have made it simple to implement and follow. Over the years, successive rounds of changes have made the DTC more complex than it needs to be. The new government should quickly bring in the simplest possible version of the DTC.
Bring NPS to the Forefront
The New Pension System (NPS) is theoretically functional, but hardly anyone uses it out of their own free will. Government employees' pensions is being managed through it, but private employees' retirement savings (PF) is being managed by the inefficient Labour Ministry's EPFO. The EPFO's service standards are abysmal and it's returns have rarely kept pace with inflation. The new government should abolish the EPFO and move all those funds to the NPS. It should put the NPS at par with other savings schemes like PPF by making its withdrawals non-taxable. There should be a separate tax incentive for investing in NPS.
Have a Unified Retirement Account
Investors should be allowed to designate any kind of saving as retirement savings and get the appropriate tax breaks on it. The only condition should be that if anything that is part of a retirement account is sold, then the proceeds must stay within the retirement account. There should be a wide range of investments that are allowed to be part of this account.
The new government should allow such a flexible retirement savings system instead of forcing everyone to conform to official ideas about how much should be put into each asset type.
Fix the Grievance Redressal System
Mis-selling of all kinds, as well as outright fraudulent practices are common in financial services. Credit cards, insurance, banking, fund investments, equity trading-all mainstream service providers are guilty of this.
Regulators haven't shown the needed enthusiasm to clean up the sectors, with RBI and IRDA being particularly tardy. What the consumer needs is a grievance redressal system that is independent from the main regulator. The new government should give these functions to a new agency which is unambiguously on the side of the customer.
Put an End to Meaningless KYC Activity
Repeated and redundant Know Your Customer (KYC) activity has become a major impediment. The provisions of the Prevention of Money Laundering Act (PMLA) acts are such that no matter what RBI and SEBI say, service providers know that they could be held liable and thus do repeated KYCs that do nothing but harass customers. The new government must make the PMLA law less onerous, mere tinkering with rules are not going to rescue citizens from the KYC menace.
Make Small Savings Inflation-linked
The RBI's inflation-linked bonds have sunk without a trace. They don't serve the real needs of savers who need protection from inflation. The new government should simply link post office returns to consumer inflation. Interest rate on post office savings products-whether cumulative or income-generating-should be set to 2 per cent above the latest CPI reading.
A New Deal for Mutual Fund Investors
Mutual funds need to have complete alignment of the commercial interests of distributors and AMCs with those of the investor. Although entry loads are abolished, distributors get paid for the transaction while the investors interests lie in sticking with a good fund. The new government must ask SEBI to create a completely new remuneration framework wherein everyone is rewarded in proportion to how long the investor stays invested and how much returns he generates.
Rationalisation of MF Expenses
Most funds now charge close to 2.75 per cent per annum. Over just five years, this can compound to almost 15 per cent. Expenses can wipe out a lot of the returns that the investor would have generated. SEBI has effectively declared the spread of mutual funds to smaller locations to be a national goal and wants investors in big cities to pay for it. The new government should insist that these cross-subsidisation be examined critically and some other way of paying for the spread of mutual funds be found.
Bring in Effective Real Estate Regulation
Real estate is under-regulated and a large proportion of developers are crooked. The Real Estate Regulation Bill was awaiting parliament's nod for Lok Sabha and has lapsed yet again. Successive versions of the bill have been made more and more lax under pressure from builders. The new government should bring in effective, undiluted real estate regulations that can protect consumers from the industry's practices. Developers who cheat investors must be given exemplary punishment.