Budget 2018: Encourage housing, retirement savings, digital transactions

As Budget 2018-19 will be the last full-year Union Budget before the 2019 general elections, I expect the government to announce tax incentives aimed at encouraging housing, retirement savings and insurance penetration. This should also be an opportunity to encourage digital transactions through differential taxation. Here is my Budget wishlist for 2018-19:

Digital Push: Reduced GST rates for digital transactions

The government has taken several steps since demonetisation to promote digital transactions. The latest being the waiver of merchant discount rate (MDR) charges on debit card transactions of up to Rs 2,000. This waiver should also be extended to credit cards and other payment options for creating a level playing field. As small traders and others in the informal sector are still resisting the adoption of digital payments, this budget should announce a 1-3 per cent waiver in GST rates for payments made through digital modes. This would financially motivate them to move to digital transactions.

Promote Housing: Tax deduction for pre-construction period

Construction delay by developers is a perennial problem in India. As many tax deductions on home loans are dependent on the possession of the property, many home loans borrowers fail to avail tax deductions for no fault of theirs. For example, one cannot claim tax deduction for home loan principal repayment under Section 80C until he receives the possession of his property. Similarly, the deduction for home loan interest payment under Section 24b, which has an upper cap of Rs 2 lakh for self-occupied property, gets reduced to Rs 30,000 on not receiving the property possession within 5 years of taking the loan. Moreover, the clubbing of the interest amount paid during the pre-construction period with that of the post-construction period for 5 years further reduces the scope of saving taxes under Section 24b.

Budget 2018 should correct this anomaly by allowing borrowers to avail both Section 80C and Section 24b deductions during the pre-construction period. The increased scope of tax deductions will boost the demand for fresh home loans and raise the disposable income of existing home loan borrowers. Alternatively, the time limit of pre-construction period can be raised from 5 years to 8 years as large share of housing projects get delivered after 5 years.

Insurance: Separate deduction for term policies

Most confuse insurance policies as a tool for long term investment. As a result, they opt for life insurance policies offering very little life cover. Many tax-payers also buy life policies with the sole intention of saving taxes under Section 80C. These leaves most tax-payers grossly underinsured. As term insurance is covers 10–15 times of one’s annual income at very low premiums, this year’s budget should create a separate section for term insurance premiums similar to the one existing for health insurance. This would incentivise people to buy term insurance policies and thereby, get adequately covered in the process.

NPS: Allow 100 per cent tax exemption and equity investing

NPS was made available to all Indian citizens on May 1, 2009. However, the poor tax treatment of its maturity corpus has stopped many from availing it for their retirement savings. Currently, only 40 per cent of its maturity amount is tax free, which puts it at a sharp disadvantage over entirely tax-free alternative like PPF, ELSS and EPF. The 50 per cent cap on equities works as another major deterrent. NPS is a long term investment instrument requiring decades of continuous contribution while equities as an asset class beat others by a wide margin for long investment horizons. Therefore, Budget 2018 should make NPS maturity corpus totally tax free and allow investors with higher risk appetite to invest up to 100 per cent in its Equity Fund option.

Equities: Continue exemption from Long Term Capital Gains (LTCG) Tax

Equity markets play a significant role in capital formation. The LTCG tax exemption on equities has a major contribution in increasing the retail investor participation in equity markets. Reintroducing LTCG tax on equities will slow down the shift of retail investors from unproductive assets like gold and real estate to equities. Hence, continue with LTCG tax exemption on equities till our retail investor participation reaches the levels seen in advanced economies.

Affordable Housing: Extend Section 80EE deductions

This Section provides first time home buyers an additional tax deduction for home loans availed during Financial Year 2016-17. Home loan interest payments of up to Rs 50,000 can be availed under this Section over and above the deduction available under Section 24b. This Section was primarily aimed at boosting the affordable housing segment as it was only made available for loans amounting to Rs 35 lakh and property value of up to Rs 50 lakh. As affordable housing segment remains a key sector for the current government, this Budget should extend Section 80EE deductions to the home loans sanctioned during the current financial year.

—by Naveen Kukreja – CEO & C0-Founder, Paisabazaar.com