Four areas in personal finance Nirmala Sitharaman can focus on to generate more fund flows

EU Budget 2022-23: Taxpayers want lower taxes, investors want more reforms and industry wants more tax deductions for the services it provides

Budget 2022: Four areas of personal finance Nirmala Sitharaman can focus on to generate more cash flow

Indian Union Budget 2022: File image of Finance Minister Nirmala Sitharaman posing for photos before presenting the annual budget in Parliament. AFP

The budget wish list of taxpayers, investors and even the financial services industry has not changed much in recent years. Taxpayers want lower taxes, investors want more reform, and industry wants more tax deductions for the services it provides. However, meeting these expectations will be difficult for a government struggling to get the economy back on track.

The four areas the government could focus on in the upcoming Union Budget 2022 for the personal finance sector are:

1) Bring parity in the tax treatment of investments in different financial sectors

Currently, the minimum holding period for units of debt-oriented mutual funds (listed or unlisted) to qualify as a long-term asset is 36 months. However, for direct investments in listed securities such as bonds/debentures, government securities, derivatives, etc. listed on a recognized stock exchange in India and zero coupon bonds (listed or unlisted), the holding period to qualify as a long-term fixed asset is only 12 months.

The holding period for long-term capital gains for direct investments in listed debt securities/and zero coupon bonds (listed or unlisted) and for investments through debt mutual funds should be harmonized and standardized. This can be done by pairing the two either by:

(i) treat investments in non-equity mutual fund organizations that invest 65% or more in rated debt securities as long-term, if held for more than 12 months, or

(ii) increasing the minimum holding period for direct investments in listed debt securities/and zero-coupon bonds (listed or unlisted) to 36 months to qualify as a long-term asset.

Raison: It only makes sense and is fair to establish parity of tax treatment for direct investments in listed debt securities and indirect investments in the same instruments through debt-oriented mutual fund regimes. This parity between direct investments in listed securities (by corporations and HNIs) and indirect investments made through mutual funds by retail investors would also prevent tax leakage.

2) Introduce a Debt Linked Savings Scheme (DLSS) to help deepen the bond market

Over the past decade, India has emerged as one of Asia’s leading financial markets. However, the Indian corporate bond market remained relatively small and shallow. There is an over-reliance on banks for funding, which hampers businesses that need access to low-cost finance. Indian banks are currently unable to expand their loan portfolios until they address the problem of existing bad loans, especially after the COVID-19 pandemic. High demands for bank funds by large companies, in effect, are crowding out small businesses from financing.

It is proposed to introduce a Debt-Linked Savings Scheme (DLSS) modeled on the Equity-Linked Savings Scheme (ELSS) to channel retail investors’ long-term savings into securities higher credit rated debt with appropriate tax benefits which will help to deepen the Indian market. Bond market.

Raison: A similar stimulus via the introduction of DLSS would help channel household savings into the bond market and deepen the bond market.

3) Mutual funds should be allowed to launch MF pension-focused schemes (MFLRS) with uniform tax treatment as NPS

Long Term Capital Gains (LTCG) arising from the sale of publicly traded shares and equity oriented mutual fund units are now taxed at the rate of 10%, if the LTCG exceeds Rs 1 lakh at during a fiscal year (gains up to January 31, 2018 is acquired).

It is proposed to bring parity in the tax treatment with regard to capital gains on the withdrawal of investments in ULIPs from life insurance companies and the redemption of shares in mutual funds, in order to establish fair conditions of competition between ULIPs and FM schemes.

Raison: SEBI, in his Long Term Policy for Mutual Funds, published a few years ago, emphasized that similar products should receive similar tax treatment, and the need to eliminate the tax arbitrage that results in launching similar products under the supervision of different regulators.

4) Shares of mutual funds must be notified as “specified long-term assets” eligible for exemption on LTCG

In 1996, Sections 54EA and 54EB were introduced under the Income Tax Act 1961, which allowed exemption from capital gains tax for investments in specified assets, including shares in mutual funds, with a view to channeling investments towards priority sectors of the economy and giving impetus to the capital markets.

However, Sec. 54EA and 54EB were removed in the 2000-01 Union Budget and a new Section 54EC was introduced, under which the long-term capital gains tax exemption is only permitted if the Earnings are invested in specified long-term assets which are repayable after three years, namely, bonds issued by NHAI & REC.

It is proposed that units of mutual funds in which the underlying investments are made in infrastructure sub-sector as notified by the Government of India, also be included in the list of long-term assets specified under Sec. 54CE. In addition, the aforementioned investment may have a lock-up period of three years to qualify for an exemption under Sec. 54CE.

Raison: Government plans to dramatically increase investment in infrastructure space will require massive financing and banks may not be equipped to finance such investments and bonds issued by REC or NHAI may be inadequate. Investing in the specified mutual funds can provide an investment alternative in addition to existing options for investors and also provide an option to earn market related returns. This will also help ease the cost of borrowing burden for infrastructure financing for the government.

Tax benefit under Sec. 54 CE for investment in the specified mutual fund will help channel the gains from the sale of real estate to the capital markets through the mutual funds and deepen the capital markets.

The author is the founder of Money Mantra – a personal finance solutions company.

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