A radical new measure in Arun Jaitley’s budget could turn out to be the fix for the Indian savers’ biggest problem. Indian savers and investors generally suffer from an upside-down asset allocation. They tend to use equity investment for their short-term investments but keep their multi-decade retirement savings in fixed-income investments. This generally gets them the worst of both worlds.
Equity is highly volatile in the short-term but in the long-term, the volatility gets compensated by high returns. On the other hand, fixed-income investment have steady returns but rarely outperform inflation.
This leads to a gradual erosion of the real value of investments as the returns generated can’t keep up with rising prices. The result is that the typical retiree finds himself pushed deeper into poverty. Unfortunately, most thinking about retirement savings is dominated by this destructive idea that fixed-income is suitable because it is safe but equity is safe.
Jaitley’s budget creates a tax-exemption incentive for investors to do something different. In the ‘Budget Highlights’ document that comes with the budget papers, there is this sentence, ‘Uniform tax treatment for pension fund and mutual fund linked retirement plan’. Pension fund here means the National Pension System (NPS).
What this means is that mutual funds can introduce ‘retirement plans’ of their existing schemes, and these will be eligible for the same concessions as investments in the NPS. While the fine print is yet to be announced, this means that investors can now invest Rs 1 lakh in these retirement plans which will get them tax exemptions under section 80CCD.
{{/usCountry}}What this means is that mutual funds can introduce ‘retirement plans’ of their existing schemes, and these will be eligible for the same concessions as investments in the NPS. While the fine print is yet to be announced, this means that investors can now invest Rs 1 lakh in these retirement plans which will get them tax exemptions under section 80CCD.
{{/usCountry}}These are retirement savings and so will be locked-in till retirement age. This opens up a channel for investors’ long-term money to earn equity returns. Up till now, there was only the Rs 1 lakh under section 80C, which had to be shared with PF, insurance, PPF and all manner of other things. Now, not only is 80C enhanced to Rs 1.5 lakh, there is this additional new avenue for equity-based retirement savings that gets a tax break too.
All in all, this budget has displayed an understanding of investment-related issues — and specially MFs — that have been always been missing in earlier ones.
(Dhirendra Kumar is the chief executive officer of Value Research)