The COVID-19-induced lockdown caused a massive disruption in economic activity, leading to an unprecedented fall in credit demand and financial well-being. Budget 2021 should aim at enhancing credit supply to the deserving, yet credit-starved segments of our society, thus incentivising financial savings for long term. Here is my wish list for Budget 2021.
Loans to first-time borrowers must be made priority lending target
Most banks and NBFCs prefer lending to those having a credit score of over 750 and monthly in-hand income of Rs 35,000 and more. This hinders credit access to ‘fresh credit’ loan applicants and lower-income groups. After COVID-19, most lenders are following even tighter underwriting norms while sanctioning new loans.
While microfinance institutions and small finance banks are playing a stellar role in widening credit access to these under-served segments, their cost of credit is too high. Hence, to enhance credit access and increase competition in the credit pricing for these segments, unsecured loans sanctioned to new-to-credit borrowers or below-prime customers should also be included in the priority sector lending target of banks. Formal regulations should also be introduced to contain the credit risk for the banks while lending to these under-served segments.
The 80C deduction limit of Rs 1.5 lakh should be increased to at least Rs 3 lakh. The pandemic, which resulted in job loss and income cuts, drove home the importance of having strong financial savings during times of need. The limit of Rs.1.5 lakh was last revised in Budget 2014-15. Increasing this limit will incentivise people to save more for their long-term financial health.
Separate deduction for term insurance
The pandemic has shown us the vulnerability of human life and the importance of having adequate life insurance that safeguards our family’s financial future. Ideally, a life cover should equal at least 10-15 times of a person’s annual income. However, most consumers confuse insurance with investment and end up buying life insurance policies that provide inadequate cover. The most cost-effective way of buying large life covers for low premium is to buy term insurance policies. A separate section for term insurance policies, independent of the Section 80C limit would encourage and incentivise people to buy term insurance policies and get adequate life cover to protect their families’ future.
Introduce a separate deduction for home loans
Currently, the principal repaid on home loans is eligible for deduction under Section 80C, whereas the interest component of up to Rs 2 lakh is eligible for deduction under Section 24b. However, with section 80C being already an over-crowded space, many home owners cannot avail maximum tax benefit on their home loan principal repayments. Even Rs 2 lakh limit under Section 24b proves inadequate for a large section of home buyers, especially in their initial years of home loan tenure. Hence, there should be a separate section for home loans, with a combined maximum deduction limit of at least Rs 5 lakh for principal and interest paid. This would boost home buyers’ sentiment and increase demand in the housing industry, which can play a major in reviving overall economic activity.
Expand benefits available under Section 80EEA
Budget 2019 introduced an additional deduction of up to Rs 1.5 lakh under Section 80EEA for interest paid on loans for purchasing affordable houses by first time home buyers. This deduction is in addition to the Rs 2 lakh deduction available under Section 24b. While this deduction was extended in Budget 2020, it is only applicable to home loans sanctioned in FY19-20. Hence, this section should be extended to the next financial year and beyond to boost home purchases in the affordable housing segment.
Moreover, as of now, only houses with a valuation of less than Rs 45 lakh are eligible to avail additional deduction. This limit should be extended to Rs 75 lakh to align with the market prices of houses, especially in the metro cities.
Restore tax parity between equity products
The LTCG tax at the rate of 10 percent on long-term capital gains from equities exceeding Rs 1 lakh in a financial year has put mutual funds at a tax disadvantage in comparison to equity oriented schemes offered through NPS and ULIPs. Hence, I expect Budget 2021 to bring tax parity between equity MFs and other alternative equity oriented investments by removing LTCG tax on all equity-oriented mutual funds.
Similarly, switching from regular plans to direct plans or from dividend option to growth option within the same mutual fund scheme are considered as sell transactions, and hence are subject to capital gains taxes. This unnecessarily increases the switching cost for investors seeking to migrate to a direct plan or growth option of the same mutual fund scheme. Hence, Budget 2021 should make necessary amendments in the Income Tax Act to stop considering intra-scheme switching in mutual funds as sell transactions, just as is the case of ULIPs.
Allow deduction for MF retirement plans
Currently, there are three types of post-retirement pension solutions in the market — pension plans offered by mutual fund houses, National Pension Scheme (NPS) and insurance linked pension plans offered by insurance companies. Investments in mutual fund retirement plans notified as pension plans by the Government and insurance pension plans qualify for Section 80C deductions as in the case of NPS investors. However, NPS investors benefit from an additional deduction of Rs 50,000 under Section 80CCD (1B). This deduction is over and above the deduction available under Section 80C. Hence, Budget 2021 should also allow investments in notified retirement plans of mutual funds and insurance pension plans to claim Section 80CCD(1B) deductions. This will enhance consumer choice in the pension sector, create a level playing field for all types of pension plans and thereby, help increase the penetration of post-retirement investment products.