Budget 2020 initiatives decoded: A mixed bag of hits and misses

Another major proposal in Budget 2020 was the decision to hike deposit insurance from Rs 1 lakh to Rs 5 lakh per depositor. This decision will help in restoring consumer confidence in the banking sector, especially in the light of recent events in some co-operative banks. Under the Deposit Insurance and Credit Guarantee Corporation (DICGC), deposits in scheduled banks including fixed deposit, recurring deposit, savings account and current account would be insured up to Rs 5 lakh.

Budget 2020 announced several initiatives to incentivise MSMEs, with the decision to allow NBFCs to offer invoice financing to MSMEs being the crucial one. This decision will enhance the credit supply to MSMEs. Another decision aimed at improving cash flow management of the MSMEs has been the app-based invoice financing loan products. The Budget also announced an increase in the turnover threshold for audit, from the existing Rs 1 crore to Rs 5 crore. This announcement is expected to improve the ease of doing business for the MSMEs. Additionally, the decision to restrict the increased limit to businesses carrying out less than 5% of their transactions in cash will incentivise MSMEs to adopt digital payments.

A major disappointment in Budget 2020 was a continuation of LTCG tax on equities and equity mutual funds. Scrapping this tax would have improved the overall market sentiment while bringing tax parity between equity mutual funds and ULIPs.

Given that the equity market plays a vital role in capital formation as well as the overall development of the economy, the removal of LTCG tax would have increased retail investor participation in equity markets and also encourage them towards long-term investment in equity-oriented mutual funds.

The government proposed a new personal tax regime in Budget 2020, which may negatively impact the long-term financial health of individuals. This requires taxpayers to forgo various deductions and exemptions available on tax-saving mutual funds, ULIPs, life insurance, medical insurance and retirement solutions. These deductions and exemptions act as a strong incentive for taxpayers, especially those lacking financial discipline, to buy financial products crucial for their long-term financial security. With the option of availing lower tax rates in exchange for forgoing these tax exemptions and deductions, taxpayers lacking financial discipline will have no reason for buying these financial products. This will negatively impact the demand for life insurance, tax-saving mutual funds, medical insurance and retirement products.

The primary objective of buying a life insurance policy should always be to provide replacement income to the dependents in case of the untimely demise of the insured. Since most people confuse insurance with investment and end up buying life policies that provide inadequate life cover, the introduction of a separate section for term insurance outside Section 80C would have incentivised people to buy a term policy and thereby, get themselves adequate life cover.