An unlimited tax break for retirement
Relatively few Indians save for their retirement, unless they are coerced or tricked into doing so.india Updated: Jul 08, 2013 01:26 IST
Relatively few Indians save for their retirement, unless they are coerced or tricked into doing so.
The coercements include NPS tier 1, provident fund or other mandatory savings which people do because they have no choice. Apart from that, a majority of people simply will not save for retirement unless there could somehow get a break on taxes for doing so.
And we know that our government’s beg-borrow-or-steal financial situation is not going to improve any time soon. This means that no new tax breaks are on the way for the middle class saver and tax payer — all largesse is likely to flow to the super-rich and the poor.
The strange thing is that we actually have a great tax break for long-term savings which few of us recognise as one. I’m talking of course about the fact that there’s no tax on long-term capital gains on equity-based investment including equity mutual funds and balanced funds.
Few investors see this as tax-break but it’s not a small advantage. Looking backwards, an investment in an equity fund would have seen your money become about 10 times over the last two decades.
If you had invested Rs 2 lakh around 1993, it would be about Rs 20 lakh today and you could withdraw all of it without being liable to pay even a paisa of tax on the income. Equity-backed investments are the only asset class which are completely exempt from tax on long-term gains.
It’s odd that a few people see this as the big deal it is in terms of retirement planning. Indian tax laws offer us limitless tax break but we don’t use it for retirement savings because it doesn’t save tax up-front.