Union Budget 2018: More tax benefits needed on home loans, retirement savings, digital transactions
February 1, 2018
The finance minister is all geared up to introduce Budget 2018. As with all previous Budgets, the country is abuzz with lot of speculations and expectations. As a large section of our society is still deprived of housing and old-age social security, government should announce incentives for boosting housing and retirement savings opportunities. Tax relaxation on digital transactions should also be announced to encourage faster adoption of digital payments. Here's a wishlist for Budget 2018-19:
Incentivise digital transactions through tax reliefs and increased ease of use
Mission demonetisation was set keeping few goals in mind; one of which was to promote digital transactions. Since then, both the RBI and the government have taken several steps to motivate people to adopt digital platforms. The Union cabinet's decision to waive off merchant discount rate (MDR) on debit cards, BHIM UPI, and Aadhaar enabled Payment Systems transactions of up to Rs 2,000 was a major step in that direction. Such waivers should also be extended to credit cards and other digital payment options for creating a level playing field for all. A 1-3% waiver in GST rates for digital transactions would also motivate smaller merchants and informal sectors to move to digital platforms.
Apart from providing tax incentives, the government should also take adequate steps to increase the 'ease of use' of digital payments. The requirement of 2 Factor Authentication (2fa) has eroded the ease of making digital payments, thereby discouraging consumers from using them for small value transactions. Even advanced economies like the US and the UK have not made 2fa mandatory for digital payments. Hence, waive off 2fa requirements for all types of digital transactions of up to Rs 5,000.
Promote Housing by extending tax deduction to pre-construction period
Construction delays by developers prevent many home loans borrowers from availing deduction available under Section 80C and Section 24b. First, one cannot claim tax deduction for principal repayment until he receives the possession of his property. Second, if the possession is not received within 5 years, the Rs 2 lakh deduction under Section 24b for home loan interest paid for self-occupied property reduces to Rs 30,000. Third, the home loan interest paid during the pre-construction period can only be claimed after distributing them equally over 5 years during the post-construction period. This feature further reduces the scope of availing tax deduction.
Therefore, Budget 2018 should take note of these concerns and allow home loan borrowers to claim tax benefits under Section 80C and 24b during the pre-construction period. Alternatively, it can increase the upper cap of pre-construction period to 8 years.
Allow separate deduction for term insurance policies
Investors often confuse insurance with investment and end up buying policies that offer very little cover and very low returns. Many buy life insurance policies only to save taxes under Section 80C. As a result, most tax-payers including those in the higher tax slabs remain under-insured. As term insurance is the most cost effective way of buying large life cover at very low premiums, a separate section for term insurance would motivate many to buy them and get adequately covered.
Make NPS more investor friendly
Despite providing an additional deduction of Rs 50,000 under Section 80CCD(1B) in addition to the Rs 1.5 lakh deduction under Section 80C, National Pension System (NPS) has failed to position itself as the most sought after retirement scheme. Currently, only 40% of NPS corpus is tax free whereas the maturity corpus of alternative retirement solutions like EPF, PPF and ELSS are entirely tax free. Another major limitation is the 50% cap on investing in equities through the equity fund of NPS. As NPS is a long term investment and equity generates highest returns among all the asset classes over the long term, why restrict equity investment to just 50% of the total contribution. Hence, this Budget should give NPS a makeover by waiving off taxes on its maturity corpus and allowing 100% contribution to Equity Fund option.
Retain Long Term Capital Gains (LTCG) Tax exemption on equities
The exemption of Long Term Capital Gains (LTCG) tax on equities has played a major role in increasing retail investor participation in equity markets. Reintroducing this tax might slow down the shift of household savings to equities from unproductive assets like real estate and gold. Therefore, recognising the role of capital markets in capital formation, LTCG exemption on equities should be continued till our retail investor participation reach the levels witnessed in advanced markets.
Promote affordable housing by extending Section 80EE deductions
This section offers additional deduction of up to Rs 50,000 to first time home buyers who availed home loans during Financial Year 2016-17. The deduction is available on the home loan interest over and above the Section 24b deductions. With an upper cap of Rs 35 lakh on the loan amount and Rs 50 lakh on the property value, this Section was primarily aimed at providing tax relief to buyers of affordable housing. Hence, extending Section 80EE benefits to home loans sanctioned in this financial year would continue the government's stated policy of promoting affordable housing.
The writer is CEO& Co-founder, Paisabazaar.com