If there’s one thing that Union Budget 2023 has achieved, it’s simplifying the personal tax structure, or at least taking a definitive step in that direction.
At the heart of the personal tax announcements was the government’s intent to encourage more and more people to eventually move to the new tax regime. There’s more on that in our Budget Special pages inside, but the takeaway that stands out for me is the need for people to take onus for their own investments and make healthier financial decisions.
Once the transition to the new tax regime is complete—which could well happen in a couple of years—there will be no tax-saving nudge for people to make their once-a-year investments that may or may not be aligned with their overall portfolios.
Experts have been crying hoarse over the years that investments should be aligned with an individual’s goals and not made solely for the purpose of saving taxes. But ask around, and you will still find that the majority of portfolios have too many tax-saving instruments (read life insurance policies).
The tax-saving season is already in full swing, and the agents’ clamour for selling life insurance will be at its shrillest now, as they may also be seeing the writing on the wall for the next year and the years thereafter: no deductions, no nudge to push investors into buying life insurance.
If the absence of deduction benefits curtails the mis-selling of insurance products—to whatever extent possible—that will be one part of the battle won on behalf of gullible investors. The government has already proposed to remove the tax incentive (returns from insurance premiums are tax-free currently) on premiums (other than from unit-linked insurance plans) above Rs 5 lakh.
For decades, people only invested in life insurance and small savings schemes to save taxes. Things changed somewhat as awareness about equity increased, and instruments such as equity-linked savings scheme (ELSS) became popular, allowing investors to allocate their tax-savings portfolio to asset classes other than debt.
The lack of the tax-saving nudge may help investments live up to their true purpose—protection for insurance, guaranteed long-term returns for small savings, and wealth creation for ELSS, and so on.
It’s time for investors to look at tax-saving instruments in a new light, for what they are worth, and realise that the tax benefit was just an additional advantage. It’s also time for investors to look at which instrument fits in with their overall portfolios and financial goals.
By doing away with deductions and announcing measures to push financial literacy among children, the government is perhaps placing the onus of investing wisely on the investors themselves. It’s time to take up that responsibility.