Budget to make you feel the good times

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Tax-saving limit and options likely to rise

Budget to make you  feel the good times
As a step to beef up investment in infrastructure, hiking of Rs 1 lakh tax exemption limit for savings in select instruments for individual tax payers is on the ca­r­ds as part of the first Narendra Modi budget in July.

It is not yet clear by how much the limit would go up but bankers who met fina­n­ce minister Arun Jaitley he­r­e on Tuesday suggested ra­i­sing it to Rs 2 lakh to spur long-term savings. But indi­cations are that gov­ernm­e­nt may settle for something in between at Rs 1.5 lakh.

The exemption is provi­d­ed under Section 80C of the I-T Act for individual taxpayers. At Rs 1 lakh exe­m­ption, the reven­u­e fore­gone is Rs 31,000 cr­ore and any hike in the limit has to be made up elsewhere.

One of the suggestions at the bankers’ meeting was to do away with tax-free bonds to make up for the revenue foregone as they are mostly bought by institutions. The government may also look at long-pending demand of banks to float infrastructure bonds, which are not tax-free but carry a higher coupon rate just like other infrastructure finance companies. It had earlier provided tax exemption to investments up to Rs 20,000 by individuals in infrastructure bonds, but withdrew it subsequently.

Banks get short and medium term deposits but lend long-term for the infrastructure sector, resulting in asset-liability mismatch.

One of the reasons for the high non-performing assets (NPA) is because of huge exposure of banks infrastructure sector where projects have been delayed resulting in restructuring of loans.

With the spurt in bad loans, Jaitley may consider seriously the bankers demand for setting up a separate national asset management company, which can take over large bad loans of public sector banks, particularly in the infrastructure sector and help in reviving companies hit by bad debts.

Jaitley said that the issues raised and suggestions made by different representatives of banks and financial institutions will be looked into in detail and will be duly considered, a finance ministry statement said.

“There were some suggestions on setting up of a national asset management company,” financial services secretary G S Sandhu told reporters after Jaitley’s pre-budget consultations with bankers and financial institutions.

The gross NPAs of public sector banks rose to Rs 2.03 lakh crore at the end of September 2013 from Rs 1.55 lakh crore in March 2013. The level of NPAs in the domestic banking system was 4.4 per cent of gross advances at the end of December 2013.

A finance ministry statement said other suggestions included recapitalisation of public sector banks and dilution of government ownership in public sector banks up to 51 per cent.

"There was discussion on NPA, there was also a proposal for setting up of national asset management company for improving the performance of debt recovery tribunals (DRT) to collect loans," HSBC India country head Naina Lal Kidwai said after the two-and-a-half hour meeting.

A strong case was also made out by bankers for strengthening the securitisation and reconstruction of financial assets and enforcement of security interest (Sarfesi) Act to ensure fast recovery of bad loans.

The huge NPA pile up is a concern for banks. In terms of provisioning for NPAs, banks have been getting a tax deduction of 10 per cent, which they now want raised to 100 per cent. “But since the fiscal situation is rather delicate, it remains to be seen how much of all this the finance minister can incorporate in the July budget,” said a banker.

A revision in the classification of priority sector limits was another demand that the bankers put forward to the finance minister. About 40 per cent of the loans have to be given to the priority sector every financial year.

The other bankers who attended the meeting included Arundhati Bhattacharya, chairman, State Bank of India, S S Mundra, chairman and managing director Bank of Baroda, IIFCL chairman and managing director Santosh Nayar, Uday Kotak of Kotak Mahindra and Raman Aggarwal of Finance Industry Development Council.

Officials say another suggestion that is expected to find favour with Jaitley is the raising of tax exemption limit for health insurance from the present level of Rs 15,000 to Rs 50,000. The Modi government is keen to take up health for all on a mission mode and in this context, the proposal assumes significance.

Kotak said the government should consider listing of insurance behemoth LIC over the next few years. "Over the next few years, the government should seriously consider listing of LIC, turning it into a public limited company. The kind of money government can raise by listing LIC is significant as it can fund funding needs of public sector banks as well as fiscal deficit," he said.

This proposal is old but the government is yet to take a view on this. "I am not saying that this is an idea which necessarily needs to be in July Budget, but over the next few years. Listing of LIC may be a game changer in the financial sector," Kotak said.

Changes in the Rajiv Gandhi equity saving scheme were also proposed so that small savers move away from gold and real estate to equity market. There is a possibility the scheme is tweaked or renamed in the budget.

Bankers have been demanding a doubling of the limit for tax deduction at source (TDS) for interest earned on fixed deposits.

Presently all fixed deposits above Rs 10,000 in banks attract TDS on interest earned resulting in a lot of paperwork. The banks have demanded that up to Rs 20,000 fixed deposit should not attract TDS on interest earned.

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