Budget 2020 initiatives decoded: A mixed bag of hits and misses

Budget 2020 was primarily aimed at providing relief to the middle class and MSMEs. From the proposal of the new personal tax regime to the continuation of LTCG tax on equities and equity mutual funds, this year’s Budget had its fair share of both hits and misses. Let’s look at some of the major hits and misses for this year’s Budget.

 Hits

 Section 80EEA benefits extended to financial year 2020-21

As expected, Budget 2020 provided the much-needed boost to the housing sector by extending the benefit of additional deduction under section 80EEA to FY21. The extension will help in achieving the government’s aim of ‘Housing for All by 2022’.

Under section 80EEA, first-time homebuyers purchasing housing property with a stamp duty value of up to Rs 45 lakh through home loan would be eligible to claim this additional deduction of Rs 1.5 lakh for home loan interest repayment. This deduction is over and above the Rs 2 lakh deduction available under Section 24b.

Deposit insurance coverage increased from Rs 1 lakh to Rs 5 lakh

Another major proposal in Budget 2020 was the decision to hike deposit insurance from Rs 1 lakh to Rs 5 lakh per depositor. This decision will help in restoring consumer confidence in the banking sector, especially in the light of recent events in some co-operative banks. Under the Deposit Insurance and Credit Guarantee Corporation (DICGC), deposits in scheduled banks including fixed deposit, recurring deposit, savings account and current account would be insured up to Rs 5 lakh.

 Improved ease of doing business for MSMEs

Budget 2020 announced several initiatives to incentivise MSMEs, with the decision to allow NBFCs to offer invoice financing to MSMEs being the crucial one. This decision will enhance the credit supply to MSMEs. Another decision aimed at improving cash flow management of the MSMEs has been the app-based invoice financing loan products. The Budget also announced an increase in the turnover threshold for audit, from the existing Rs 1 crore to Rs 5 crore. This announcement is expected to improve the ease of doing business for the MSMEs. Additionally, the decision to restrict the increased limit to businesses carrying out less than 5% of their transactions in cash will incentivise MSMEs to adopt digital payments.

Misses

 Continuation of LTCG tax on equities and equity mutual funds

A major disappointment in Budget 2020 was a continuation of LTCG tax on equities and equity mutual funds. Scrapping this tax would have improved the overall market sentiment while bringing tax parity between equity mutual funds and ULIPs.

Given that the equity market plays a vital role in capital formation as well as the overall development of the economy, the removal of LTCG tax would have increased retail investor participation in equity markets and also encourage them towards long-term investment in equity-oriented mutual funds.

Strong disincentive for long-term savings

The government proposed a new personal tax regime in Budget 2020, which may negatively impact the long-term financial health of individuals. This requires taxpayers to forgo various deductions and exemptions available on tax-saving mutual funds, ULIPs, life insurance, medical insurance and retirement solutions. These deductions and exemptions act as a strong incentive for taxpayers, especially those lacking financial discipline, to buy financial products crucial for their long-term financial security. With the option of availing lower tax rates in exchange for forgoing these tax exemptions and deductions, taxpayers lacking financial discipline will have no reason for buying these financial products. This will negatively impact the demand for life insurance, tax-saving mutual funds, medical insurance and retirement products.

No incentive towards increasing insurance penetration

The primary objective of buying a life insurance policy should always be to provide replacement income to the dependents in case of the untimely demise of the insured. Since most people confuse insurance with investment and end up buying life policies that provide inadequate life cover, the introduction of a separate section for term insurance outside Section 80C would have incentivised people to buy a term policy and thereby, get themselves adequate life cover.

Naveen Kukreja is CEO and Co-founder of Paisabazaar.com.

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