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It's time for action: the budget and tax saving

Union Budgets play a huge role in getting savers to start investing, which is why the upcoming budget must enhance tax-saving policy


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Piyush Goyal's interim budget of February 2019 was like the last scene of a thrilling film just before the interval. The audience got enough to whet their appetite but had no way of knowing what would come later. Now that everyone is back in the theater and the movie has started again, the mystery has only deepened.

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There's a certain formulaic routine to the anticipation that builds up in the media before the Union Budget every year. The elements are familiar: the economy needs a boost, infra spending needs a boost, fiscal deficits are under strain, tax-saving limits (80c) may be increased, income tax exemption may be raised, etc. The last two are a percentage shot with a high probability of success because they do end up getting raised every couple of years or so and that always makes it worthwhile to predict them.

Of course thanks to GST, an old part of this routine discussion - indirect taxes - is now gone. Those changes can be made at any point in the monthly GST Council meetings and in any case, as the new tax system settles down, the frequency of changes has also declined. Every single thing about indirect taxation in the Indian economy can now be changed without any reference to the Union Budget.

In fact, one of the most significant things that has happened in recent years is that the budget is far less significant. In any everyday sense, it's highly likely that anyone reading this column will see a big, immediate impact in their lives because of something that Ms Sitharaman does on July 5th. For example, if the 80C limit is raised from Rs 1.5 lakh to Rs 2 lakh (which would be a big jump) then even those in the highest tax bracket would see their monthly tax bill fall by about Rs 1300. For those earning more than Rs 10 lakh a month, that's nice but barely noticeable. For those in lower tax brackets, the equation is similar, except that the investment-to-saving ratio is worse. All in all, good for the headlines but not a life-changer for anyone.

Or is it? That's the conventional wisdom but I think it's wrong. An increase of the Section 80C tax-saving limit has a huge downstream impact on people's lives which has nothing to do with the tax saving in the current year. Almost every tax-payer makes an effort to fully utilise 80C to the extent possible and the great thing about 80C investments is that through ELSS funds, they often act as a gateway to becoming a long-term equity investor. Savers who try out ELSS funds to save tax get a pleasant experience because the three-year lock-in makes it a reasonably long-term investment. After this first-hand taste of the equity returns that can come from longer holding periods, they are primed to become equity investors.

Thus, an extra Rs 50,000 tax-saving limit has a huge multiplier effect on the total lifetime savings that a saver is likely to make, and the obvious follow-on effects on general old-age comfort and happiness.

In fact, one of the biggest reforms in tax-saving policy can be to stop and reverse the dilution of the investment-related nature of Section 80C tax-saving limit and disallowing expenses. The biggest among these - which a lot of taxpayers appear to use - is children's education fees. I'm not arguing against the fact that school and college fees should be deductible from taxable income, but by lumping them with savings and investments, the government is shortchanging savers. 80C was supposed to be entirely about financial savings, that is money that you get back later. Education fees should be made separately deductible, and not as part of 80C. The case for term insurance is also similar.

I may be overly influenced by years of daily contact with people who have problems arising from not making enough savings or from the wrong kind of savings, but I strongly believe that using tax-policy to enhance individuals' savings rate is the single biggest positive effect that the budget can deliver.

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