Budget 2021 Expectations: Steps To Increase Credit Access & Financial Well-Being

Budget 2021 should amend IT Act to stop intra-scheme switching in MF from being considered as sell transactions

Budget 2021 Expectations: Steps To Increase Credit Access & Financial Well-Being
Budget 2021 Expectations: Steps To Increase Credit Access & Financial Well-Being
Naveen Kukreja - 23 January 2021

COVID pandemic led to an unprecedented fall in credit access and financial well-being for many. Hence, this year’s Budget should announce steps to improve the situation by offering a wider choice in tax saving instruments. As the housing industry has a multiplier effect on jobs and core sectors of the economy, Budget 2021 should also offer tax sops for home loan borrowers to boost housing demand.

Here are my expectations for Budget 2021.

Include credit sanctioned to first-time borrowers and lower-income groups in banks’ PSL target:

Most institutional lenders prefer to lend to loan applicants with credit scores of 750 and above. Additionally, they also prefer loan applicants with a monthly in-hand income of Rs 35,000 and above. These parameters reduce the chances of availing loans and credit cards for ‘new to credit’ loan applicants and those belonging to lower-income groups. Owing to large scale income disruption caused by the pandemic, most lenders have further tightened the eligibility norms for fresh loans and credit card sanctions.

While the small finance banks and micro-finance institutions have successfully increased credit access to these under-served segments, the interest rates of loans offered by these institutions are on the higher side. Hence, this year’s Budget should enhance credit access for these under-served segments and reduce their credit cost by including unsecured loans disbursed to below prime customers and to new-to-credit borrowers in the Priority Sector Lending (PSL) target of banks.

Extend Section 80EEA benefits to next financial year and beyond:

Section 80EEA was introduced in Budget 2019 to offer an additional tax deduction of up to Rs 1.5 lakh for home loan interest repaid by the first time home buyers for buying housing properties with a stamp duty value of up to Rs 45 lakh. This deduction is over and above the Section 24b deduction of up to Rs 2 lakh on home loan interest repayments. While Budget 2020 extended Section 80EEA benefits to home loans sanctioned in FY19-20, this year’s budget should make this deduction a permanent feature or at least extend it to the next financial year to stimulate demand in the affordable housing sector. Additionally, the upper cap of Rs 45 lakh on stamp duty value of home properties should be increased to Rs 75 lakh to increase the coverage of Section 80EEA, especially in the metro cities.

Equality in the taxation of equity MFs and other equity-oriented investment products

When it comes to the taxation of investment proceeds, mutual funds have been placed at a disadvantageous position vis a vis equity-oriented schemes offered through ULIPs and NPS due to the levy of LTCG tax at 10 per cent on long term capital gains from equities exceeding Rs 1 lakh in a financial year. This year’s Budget should restore a level playing field for mutual funds by removing LTCG tax on all equity-oriented mutual funds or at least the tax saving mutual funds (ELSS).

Similarly, switching from regular plans to direct plans and from dividend option to growth option of the same fund is considered a sell transactions and are subject to capital gains taxes. As this increases the investment cost for investors seeking to migrate to a growth option or direct plan of the same fund, this year’s budget 2021 should amend the IT Act to stop intra-scheme switching in mutual funds from being considered as sell transactions, just like the ULIPs.

Allow all individual investors to invest in NPS Tier-II Tax Saver Scheme

Budget 2020 introduced an exclusive tax-saving instrument for Central Government employees called NPS Tier-II Tax Saver Scheme. While the scheme is optional for the Central Government employees, it comes with a lock-in period of just three years and a fixed asset allocation of 10-25 per cent in equities and the rest in debt instruments. Hence, Budget 2021 should allow self-employed individuals and employees of state governments and the private sector to invest in NPS Tier-II Tax Saver Scheme. This will not only benefit them from the low-cost investment offered by NPS, but it will also allow them to avail Section 80C deductions through debt-oriented investments, especially during overvalued markets.

Introduce a separate deduction for term insurance:

Ideally, an individual's life insurance cover should be at least 10-15 times of his annual income. Buying term insurance policies is the most cost-effective way of buying such large life covers with low premiums. Hence, Budget 2021 should introduce a separate section for term insurance policies to incentivise consumers to buy term insurance policies and get adequate life cover to secure the future of their dependents.

Introduce a separate deduction for home loan repayments:

With multiple investment options, insurance policies, small savings instruments, pension plans, etc. crowding Section 80C, many home loan borrowers cannot avail of a tax deduction on their home loan principal repayments. Similarly, many home loan borrowers, especially those in the initial years of their home loan tenure, cannot avail of deduction on their entire interest repayment component under Section 24b due to the upper cap of Rs 2 lakh per financial year. Therefore, the Budget should introduce a separate section for home loan repayment with a combined deduction of up to Rs 5 lakh to repay both principal and interest components.

The author is CEO& Co-founder, Paisabazaar.com

DISCLAIMER: The views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.