A worrisome fall in domestic savings

Budget 2015 is poised to set the roadmap for India’s growth story. The Budget will be presented in the backdrop of improving macroeconomic trends and falling oil prices. The latest Central Statistics Office (CSO) release pegged economic growth in the current year at 7.4 per cent against 6.9 per cent in 2013-14. However, the falling domestic savings rate still remains a matter of concern.

Domestic saving as percentage to GDP has declined from a high of 36.8 per cent in FY08 to 30.1 per cent in 2012-13. The sharp fall is primarily due to plummeting financial savings of households from 11.6 per cent to 7.1 per cent during the same period.

With the Budget around the corner, the government should encourage domestic financial savings through fiscal incentives giving additional scope to taxpayers to save more while saving tax.

Some avenues that may be explored towards this objective are discussed here.

Revising the tax slabs : The last Budget increased the basic exemption limit by ₹50,000, a move that was welcomed by all. However, considering the per capita expenses of individual taxpayers, the government should raise the basic exemption limit to ₹3 lakh in line with the parliamentary standing committee’s recommendations on the Direct Taxes Code. The threshold of ₹10 lakh for peak rate also needs to be enhanced to ₹20 lakh. This would increase the disposable income of taxpayers and lead to investment in the economy.

Threshold limit under Section 80C : The current threshold of ₹1.5 lakh leaves little cushion to taxpayers as various investment avenues are clubbed into an overall ceiling limit of ₹1.5 lakh. Most of investments made under Section 80C contribute to the financial savings of households. Enhancing the ceiling limit would give a fillip to domestic savings. Expenditure such as tuition fees should be eligible for deduction under a separate section thereby giving more scope for investment under Section 80C.

Deduction in respect of amount paid under pension plans/life insurance premiums : Pension plans and life insurance are seen by most individuals as long-term investments. These pension plans and insurance premiums in turn invest in the financial sector giving an impetus to domestic saving and investment. A separate limit for claiming deduction under these avenues is the need of the hour.

Investment in term deposits : Deduction under Section 80C is available for individuals/HUF for investment in term deposit for a period of not less than five years. Other financial investments such as mutual funds have a lock-in period of three years. Hence, the tenure of term deposits to claim deduction need to be reduced to three years to align with other investment avenues.

Deduction in respect of health insurance premium : Deduction is available to individuals towards health insurance premium and payment towards comprehensive medical check-up. However, with rising medical costs and the unavailability of a government-sponsored comprehensive healthcare system, a higher deduction limit of ₹50,000 is called for to ensure adequate coverage to individual taxpayers. With an increase in the limit, income will be channelised into saving which is otherwise used for medical expenses, at same time ensuring medical coverage in an economy where public health benefits are mostly absent.

Deduction on interest earned on bank account : Deduction up to ₹10,000 is available for interest earned from saving bank accounts. A country with less financial inclusion and lower financial depth should give more sops to taxpayers by extending deduction to the interest earned from fixed deposits and enhancing the limit to ₹25,000.

Investment in equity saving schemes/infrastructure bonds : Individuals with gross total income up to ₹12 lakh are eligible to invest under the Rajiv Gandhi Equity Savings Scheme; deduction is available to the extent of ₹25,000. Investment in the capital market by the small investor is minimal. To mobilise saving and investment by retail investors, deduction should be available to small investors who have few investments and the limit should be enhanced to ₹50,000.

With the government’s ‘Make in India’ campaign and thrust on infrastructure, the deduction available on investment in infrastructure bonds needs to be restored.

Standard deduction for salaried individuals : The standard deduction for salaried individuals should be re-instated to at least ₹1 lakh to reduce the tax burden of the salaried class. This will give further stimulus to domestic savings by individuals.

Exemption limit for various allowances : Exemption limits for conveyance/education allowance were fixed long back and have not changed despite continuous inflationary conditions. Hence, these limits need to be considerably raised with the rising costs.

India’s domestic savings rate standing on the global map is better compared to developed countries as these are primarily consumption driven economies. The savings rates of China (51.8) and Singapore (52.1) are much higher. This can be attributed to institutional support and demographic composition in China and compulsory coverage of central provident fund in Singapore. The recent amendment by the government in the Provident Fund Act by increasing the ceiling limit is a welcome step to widen the coverage under the retirement scheme and will further boost domestic savings.

On the sidelines of the recent bi-monthly monetary policy release of the Reserve Bank of India, the governor also indicated a need to encourage domestic savings through tax incentives. We hope the government will pay heed to his comments.

Ghose is a partner and Bharech deputy manager at Deloitte Haskins & Sells LLP

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