Less than a fortnight left before FM Nirmala Sitharaman reads out her final full budget of the union government and expectations are already building up among middle class on multiple fronts, hoping not just to earn some but also to save more
Less than a fortnight is left for final full budget presentation before the all-important general elections are held in 2024. Lines are already drawn if the biggest annual extravaganza – Budget 2023 – will be pragmatic or populist. Come 1st of February, we will get to know as to what extent, has the budget lived up to the speculations and expectations.
But, in a turn of events recently, Finance Minister Nirmala Sitharaman said that she comes from a middle-class family and she knows the challenges of common man. What happens on 1st of February is something that will unfold only on that day but is it a subtle messaging from the FM that the government is mindful of the anxiety being faced by the common man and could take a few steps that would help them save some money?
The last three years have been very challenging for the common man, like anywhere in the world, in light of triple whammy – two, years of Covid-19 which has eaten into his savings, unfortunate income-related challenges and a year of very high inflation throughout 2022.
Indian middle class is pinning great hopes from the government and would love any incentives around taxation and investments.
One of the biggest demands from the government is to increase exemptions on individual tax slabs. The government introduced a new tax regime in Budget 2020 while retaining the old regime, thus giving options to the tax payers to opt for either of the two regimes. In the older regime, four income tax slabs exist, where there is no tax for income up to Rs 2.5 lakhs; 5 per cent on income between Rs 2.5-5.0 lakh; 20 per cent on income between Rs 5.0-10 lakhs and 30 per cent on income above Rs 10 lakh.
The demand is to increase the slab’s upper limit in all slabs for income tax payers to reap more benefits. The exemption limit of up to Rs 2.5 Iakh has not been changed for several years and need to be revisited. Also, there is criticism about slab rate jumping to 20 per cent from 5 per cent. A more moderate rate seems to be what the general expectation is.
While there have been few takers of the new tax system which has 7 income tax slabs and had done away with all tax exemptions or deductions, the government could consider adding some sweeteners to increase traction towards it. There have been media reports that the government could allow some exemptions in it to make it more lucrative for the people. With exemptions, this could be a big deal-clincher for the government as the minimum and maximum exemption slab limits are higher with more slabs in between.
Another major relief that being sought is to increase exemption limit under Section 80C which is currently at Rs 150,000 annually. It is a demand long overdue. The limit was increased last in 2015 from Rs 1 lakh after almost a decade. This may be perceived to be too little for an average household and considering the inflation, and rupee’s falling purchasing power year-on-year. The government must at least double this exemption limit as it is the need of the hour.
Under 80C, exemptions are given for term deposits like PPF, saving schemes like Sukanya Samridhi Yojana, National Saving Certificate and a host of other schemes. Even the principle component of the home loan EMIs is covered under this section.
The banks have been increasing interest rates over the past 9 months and any softening or plateauing is unlikely this year. The people will have to bear higher EMIs or have to prolong period of payment for several months or years now and that may bear a little dent on their pockets. The government might incentivize the common man increasing 80C exemptions. Buyers can also claim deductions under Section 24B on payment of interest up to Rs 2 lakh. The expectation is that government raises total exemptions (principle + interest component) to Rs 5 lakhs.
Another important demand is to increase the threshold of Long-Term Capital Gains (LTCG). Currently, investors are required to pay 10 per cent as LTCG on holding stock/s beyond a period of 1 year and threshold of Rs 1 lakh. The fraternity including investors brokers and personal finance experts have been emphasizing on the need to rationalize the structure.
Indian government is not likely to be at a loss in terms of revenues as volumes will take care of it. We are seeing a growing pool of retail investors. As of 31st of December 2022, there are over 10 crore retail investors. In the calendar year, there has been an over 30 per cent year on year growth.
All these steps will directly and indirectly revive the economic cycle as well as deposits and investments will grow infusing much needed capital in banks and financial institutions. While banking sector is growing in a robust manner, one of the headwinds for them is sustaining a momentum in their deposits to meet the credit demand in a growing economy.
If people don’t save much, it is unlikely that they will invest or be able to retain money in their banks. Also, we have seen that as banks are increasing interest rates on loans, they have also been increasing interest rates on deposits to encourage people to increase deposits. That could impact their margins and net interest income.
The government or the banking regulator, the Reserve Bank of India (RBI) does not want to be in a situation where they are required to intervene should banks fail to maintain enough deposits with them.