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A Perfect Combination of Vision and Action

The Modi government’s first budget is highly focussed about what needs to be done, and how it has to be done

In the hours following Arun Jaitley’s budget speech, the most frequent complaint among the talking heads on the TV channels was that the budget was short on vision. This sounds like what cricket commentators call a pre-determined shot. In our analysis, the budget has a set of coherent goals, and sets the government into the direction in which those goals can be achieved viably. Some of the goals will take less time and some more, but it’s not easy to fault the choice of goals, or the direction that has been taken.

Broadly, the budget has three themes, which flow directly from the biggest problems that the country is facing. These are: (1) Infrastructure, (2) Employment generation, and (3) Enhancement of Savings

On each of these, there is a set of measures that sets the direction for solving the problem. For example, on infrastructure, these range from a large (about Rs 45000 cr) government expenditure plan, to new tax structures for REITs, the introduction on InfraREITs and a host of others. On employment generation, there is a huge new focus on funding and facilitation for startups and SMEs.

However, let’s focus a little closely on our topic, which are savings, investments and the investment markets. There’s a long list of measures that together produce a much more conducive environment for investing. Here are some highlights:

* Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

* Introduce one single operating demat account

* Kissan Vikas Patra (KVP) to be reintroduced.

* A special small savings instrument to cater to the requirements of educating and marriage of the Girl Child to be introduced.

A National Savings Certificate with insurance cover to provide additional benefits for the small saver.

* Personal Income-tax exemption limit raised by Rs 50,000

* Investment limit under section 80C of the Income-tax Act raised from Rs 1 lakh to Rs 1.5 lakh.

* Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs 1.5 lakh to Rs 2 lakh.

* Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains.

All in all, this is a comprehensive set of changes that combine vision and action.

However, a couple of points need more detailed explanation. The biggest positive is that the total amount of tax-exempt investments that can be made in equity-backed mutual funds have gone up manifold. This will benefit enable investors, mutual funds, as well as the equity markets as a whole. The big change (in fact, I would call it a revolutionary change) is in the creation of a new creature called the mutual fund retirement plan, but more on that later.

The large increase comes from a combination of different sources. First, of course, tax exempt investments through section 80C have gone up from Rs 1 lakh a year to Rs 1.5 lakh. Section 80C has been the only way for investors to make equity investments and save taxes in doing so. This means a big jump in the amount that can be invested in the funds that are designated for the purpose, the so-called ELSS funds. Since for many investors, a chunk of the Rs 1 lakh under 80C would go into mandatory deductions or in insurance, the amount available for ELSS was typically lower. An increase of 50% in the total limit could easily mean a doubling or more of ELSS investments for the typical investor.

However, the budget has another great new investment avenue which seems to have been introduced by stealth. It finds no mention in the speech, and all that one has is this somewhat cryptic sentence in the ‘Budget Highlights’ document that comes with the budget papers. Here’s what it says, ‘Uniform tax treatment for pension fund and mutual fund linked retirement plan’. Pension fund here means the National Pension System (NPS). What this means is that mutual funds can now introduce ‘retirement plans’ of their existing schemes, and these will be eligible for the same concessions as investments in the NPS.

While the fine print is yet to be announced, this means that investors can now invest an additional Rs 1 lakh in these retirement plans which will get them exemption under section 80CCD. These are retirement savings and so will be locked-in till retirement age. This opens up a channel for investors’ long-term money to earn equity returns. While the specifics could bring some caveats, it all adds up to a huge jump in the total amount of tax-exempt equity savings that are possible. If someone was earlier using half of their 80C limit for equity mutual funds, the total now goes up to potentially Rs 2 lakh. That’s certainly a revolution in long-term savings.

We find that all in all, the general coherence of vision in Mr Jaitley’s budget is emphatically sustained in what he has done on the savings and investments front. It rather makes us look forward to more Jaitley Budgets in the years to come.