India needs a middle-class-friendly Budget

Finance Minister Nirmala Sitharaman is preparing to present the Union Budget for the sixth consecutive year. With July 23rd hardly a fortnight away, a palpable sense of anticipation among the public is evident, as past experiences have proved that the Budget offerings, especially on matters that impact the general public, are almost always mismatched with the current economic indicators.

Despite all the industrial and economic growth targeted in the interim budget in February, the most relatable benefit that concerns an ordinary taxpaying citizen is a change in tax benefits — what portion of their hard-earned savings should they forego for the greater good?

The working middle class is the backbone of our economy, but this is overlooked when it comes to tax benefits and incentives for this class. A significant aspect of being a person in the ‘middle class’ is understood to be their dependency on a monthly income. The painful irony is that the income they earn as well as most of the investments they make to secure their retired life are taxable, all the while having a laughable social security system.

The call for a significant raise in the rates of standard deduction and deduction limits under various heads and extension of tax slabs, should not be seen as a deterrent to the earning capacity of the government, but as a need of the hour to alleviate the demographic’s burden, given that most of these existing limits have seen half-decade anniversaries, if not more.

This would provide much-needed relief to the middle class and incentivise savings and investment for their future, thereby creating more stability in India’s economic growth. The government should acknowledge that the current income tax slabs and structure do not keep pace with inflation and rising costs of living, and the Budget should reflect this.

Also, when an investor moves their investments from one mutual fund to another, within the same asset management company, they are required to pay a capital gains tax. This is unfair to the investor, who has not realised those gains, acting as an enormous deterrent to efficient portfolio management.

Intra-scheme transfers should be exempted from the capital gains tax, encouraging active management of portfolios, optimising investments and financial prudence, without the fear of unfair additional tax liabilities. These rectifications will benefit the ordinary person by effectively allowing them to grow wealth out of their savings. The new budget should be an enormous boost to investors, allowing greater flexibility without penalising prudent personal finance management. 

Another area on similar lines is that better tax benefits must be provided for purchasing property, which remains a primary investment option, especially in Tier II and Tier III cities.

A crucial plight that affects senior citizens is the taxation on retirement funds and pensions of senior citizens. Currently, the State taxes the return on retirement savings of senior citizens who lack a pension scheme. This norm is a serious concern for personal finances for the elderly because the sole means of support for a section of them are their self-planned retirement funds and the returns on such funds. The Budget should exempt the returns on retirement funds from tax; this would be a much-needed relief for senior citizens.

In addition, only two slabs of tax benefits exist for the elderly: senior citizens (between the ages of 60 and 80) and super senior citizens (above the age of 80). Keeping in mind the financial realities the elderly face, the Budget can adopt a gradient approach, with incremental benefits at 65, 70, and 75.

Medical expenses have reached a new high for people of all ages, and awareness about the necessity for insurance coverage is also on the rise. This ties in with the IRDAI’s mission to achieve ‘Insurance for all’ by 2047. The government needs to keep pace with the revolutionary changes taking place in the insurance sector, and significantly step up insurance benefits under the tax regime to further motivate people to get insured.

A more progressive Budget as compared to the earlier versions and more importantly, a realistic tax regime, could provide significant relief to the salaried middle-class taxpayers who are the significant contributors to India’s growth in all aspects, considering that they drive our revenue as well as commerce. Their ability to save and spend is a critical element of economic stability. Even if the government faces a small reduction in revenue by reducing the tax liability of the middle-class, their earnings continue to contribute to the economy in the form of more purchases or investments, while it provides them a sense of satiety.

While Indians are accustomed to the minimal government support and expect nothing out of our poorly ranked social security system, the government can considerably help them by addressing the actual needs of the middle-class and enabling them to save better.

Coalition governments generally come out with Budgets that are middle-class-friendly. Let us wait to find out if this Narendra Modi-led government is bringing relief to the middle class.

(Puzhankara Sivakumar is a practising company secretary, Ranjith Krishnan is a sustainability consultant, and Anju Panicker is director, SEP Learning and Corporate Solutions Private Limited.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.