Lovaii Navlakhi, founder and CEO, International Money Matters
In the run-up to the Budget, people expected the tax exemption limit of Rs 1.5 lakh under Section 80C to be increased and the creation of a separate section for exemptions for equity-linked savings schemes (ELSS), or one that would cater to the retirement funds being launched by mutual funds. In short, there were expectations of a million little things that would help save tax and increase disposable incomes.
However, the government decided to take an unexpected route - it tried to provide an impetus to the otherwise neglected National Pension System (NPS). The NPS was launched in 2004, with the intention of providing some form of social security in the form of a defined contribution-based pension system.
The advantage of the NPS over the Employee Provident Fund (EPF) is that the investor can choose where to invest his money. There are options of equity exposure unlike an EPF which is entirely debt-oriented and the investments are exempted from tax, too (up to Rs 1.5 lakh). However, if the employer has opted to contribute to this scheme, an additional Rs 50,000 is also deductible under Section 80CCD(2). The EPF has an EEE (exempt-exempt-exempt) status and hence the maturity amount is tax free. However, under the NPS the maturity amount is taxable and so are the annuities that will be paid therefrom. So, this makes the NPS a much lesser attractive option on the tax front. However, people remain divided in their opinion of the taxation benefits under NPS. More clarity is awaited on this and hopefully, the government will take cognizance of this and introduce changes that would make the NPS more attractive.
The other big positive in the Budget is the enhanced limit on deduction of health insurance premium - from Rs 15,000 to Rs 25,000. For senior citizens, this limit has been increased from Rs 20,000 to Rs 30,000. We have seen health care costs shoot up in the recent past with access to better facilities and the budget clearly resonates this fact. For example, if you are 30 years old, treatment of an illness which costs Rs 3 lakh today will cost over Rs 50 lakh thirty years later if inflation is at 10 per cent per annum. Do think about this when you decide how much health insurance you need? You may be surprised to learn that it does not cost an arm and a leg (a quick calculation for two adults aged 30 years with a child shows that the annual premium will be around Rs 25,000).
NPS vs EPF
Earlier, limits were lower and hence the deduction seemed fine. By increasing the deductible limit, the government is also nudging the individual to take better/higher health insurance and thereby protect himself/family with a more realistic figure. Senior citizens above the age of 80 years not covered by health insurance will also be allowed deduction of Rs 30,000 for medical expenses.
An interesting addition was proposed in the Budget under Section 80C - an instrument that helps save for the girl child. Although it is not an additional option in this section, the Sukanya Samridhi scheme is a welcome option. This is a scheme for the minor girl child with an EEE status and the investment, income from investment and the maturity amount are all tax exempt/tax free. The interest will be declared each year and compounded annually. One can withdraw funds for education/marriage or when she turns 21. The account will be opened in the name of the girl child. This seems like a good option for people who would like to invest a part of their savings in fixed interest instruments for their daughters (up to a maximum of two daughters). How much they should direct towards investing in this scheme is something that they decide after consulting their advisor.
Some of the provisions under Section 80C (a limit of Rs 1.5 lakh under the below instruments) are still available: For instance:
>> Contribution to the EPF account
>> Principal repayment of home loan
>> Investment in the Public Provident Fund (PPF) account
>> Investment in ELSS
>> Children's school fee
>> Investment in a five-year fixed deposit in bank
You can also claim tax deductions under Section 80G, if you are donating money to a charity.
Overall, the Budget does encourage people to save more and invest the right way, maybe even take higher insurance so they can face any curve ball that life throws at them. But should we wait for the finance minister to give us reasons to make better investments?
I would recommend that you look at your financial goals first, your risk profile next and then determine what your asset allocation should be. Investments should be looked at after you are clear on all the points mentioned earlier. It is very easy to get lost in the noise of the market. Get your first three answers right and you have won more than half the battle. So, don't wait for the finance minister to give you reasons to make the right choice when it comes to your investment - take the initiative yourself. Invest according to your goals and risk appetite, not that of your friends or neighbours.
(The author is founder and CEO, International Money Matters)