A huge thrust to financialisation of the economy. This is the undercurrent message that stood out in Finance Minister Nirmala Sitharaman’s budget speech. The FM laid out seven priorities (saptarishi) for the country in which ‘financial sector’ was accorded the seventh place. There are four key announcements that deserve attention. These will pave the way for a financially empowered India where even last mile will be financially educated.
New Tax Regime to Rule
The government had introduced the new tax regime in Budget 2020. This exemption-free tax regime did not find many takers. In Budget 2023, the government has made it the default tax regime. Whatever changes in personal income taxation have happened are linked to the new one. Notably, income up to Rs 7 lakh is now tax free, but only in the new tax regime. It is Rs 5 lakh in the old one.
The government has revised the tax slabs for those who opt for the new regime. Interestingly, it has also introduced standard deduction of Rs 50,000 under the new one. This will ensure people have more income at disposable which may get routed to investments. The government has also reduced the highest effective tax rate from 42.7 per cent to 39 per cent. Providing more incentives under the new tax regime to middle class will also widen the net of those who can invest.
Simplified KYC
Financialisation at scale is possible only if digital KYC is up and going. FM Sitharaman announced to simplify the KYC process and make it completely digital by adopting a ‘risk-based’ instead of ‘one size fits all’ approach. Financial sector regulators are expected to create a KYC system that meets the needs of Digital India. This will ensure the mutual fund industry onboards investors much easily. Moreover, there will be a one stop solution for reconciliation and updating of identity and address of individuals maintained by various government agencies, regulators and regulated entities. It will be established using DigiLocker service and Aadhaar as foundational identity.
Financial literacy
Sitharaman emphasised on financial literacy for the young India. She announced setting up National Digital Library for Children. The library will provide reading material and educational resources to children and adolescents. “To inculcate financial literacy, financial sector regulators and organisations will be encouraged to provide age-appropriate reading material to these libraries,” the FM said. The MF industry focuses on financial awareness. The industry hopes to welcome more inflows as the young India gets financially literate.
Tax arbitrage gone
Old tax regime offered about 70 tax exemptions and deductions. While individuals have to do their own math about which one works better for them, it seems old tax regime will be phased out. If that happens
the tax arbitrage to investments available in section 80-C of Income-Tax Act over mutual funds will be gone.
These investments are likely to move to MFs. Secondly, the government has introduced an amendment in the Finance Bill to tax market linked debentures (MLDs) as short-term capital gains. It fixes a loophole that may drive investments from MLDs to equities.
The time has come for financialisation of savings from old investment avenues such as insurance, fixed deposits and small savings schemes to mutual funds. Personally, one theme that made me smile was the focus on tourism, because India has tremendous potential as a tourist destination and tourism can be a meaningful driver of the economy. Kudos Budget 2023!
(Views expressed are her own)
Radhika Gupta MD & CEO, Edelweiss MF