New Finance Act: Downside for investors on withholding tax news

While individuals will have more disposable income as a result of the new tax regime, the extra income is more likely to be spent on lifestyle expenses rather than invested for long-term goals, as is evident from the above questions. It is worrying to see that investors are not thinking about retirement planning in the absence of tax benefits. least, 50,000 additional tax benefits over and above Section 80C to investors considering investing in NPS. There has been hesitancy to subscribe to NPS and the take-up on NPS is less than 10% in most of the companies as employees are not sure how the market linked retirement product will perform in the long term. I doubt that new tax regime adopters will now consider NPS as well.

With the return of long term capital gains and indexation benefits on debt funds, investors will be inclined to chase returns at the cost of safety. With the low returns in the past few years, investors were inquiring about bonds, peer-to-peer (P2P) lending, invoice discounting etc. Investors do not understand the risk associated with investing in low-rated bonds. What happens when an issuer gets downgraded and has to pay a higher coupon and also provides an exit for investors. How will the investors get their money back? In case of debt funds, there are clear guidelines on the quality of bonds that can be invested in and the issuer is monitored by a professional fund manager. How investors will chase borrowers in case of default in P2P. Investors do not realize these risks until a negative event occurs. Even in the case of Direct Retail Bond Scheme of Reserve Bank of India, investors do not know what to do in case of fall in the bond price.

Then there is the issue of getting into high-cost investments such as investment-linked insurance plans, whose returns do not beat inflation. Relaxation to allow policies with total premium less than Rs. 5 lakh being tax free means that a large population of India is at risk of being mis-sold to products that do not add to their wealth.

International funds allow investors to invest in foreign stocks at a much lower cost and with much less tax compliance than investing directly in these stocks. Most investors who buy international stocks are unaware of the tax return filing process for these holdings and are more likely to receive tax notices. Withdrawal of long-term capital gains (LTCG) on international funds will add to the high transaction cost and stress of dealing with tax notices and hefty fines running into lakhs of rupees that will have to be paid on defaults or wrong filings of foreign shares. I would urge investors to pay attention to the above issues and focus on their financial goals. The additional savings due to the new tax regime should be channeled into investments. Choose low cost and low risk investments instead of chasing high fixed return instruments or considering investments like insurance plans as they offer tax deductions.

Lack of financial awareness is leading investors to take wrong decisions which will put pressure on their finances. Tax News is an effective way of encouraging people to save in the right way. Removing these tax nudges has far-reaching consequences on the long-term financial health of citizens. Therefore, the government should re-look at introducing tax benefits on NPS subscriptions under the new tax regime, and tax parity with all market-linked debt instruments such as debt funds and insurance plans. Surely, there must be some tax benefit on fixed deposits for an investor taking market risk. At a minimum, funds other than target maturity funds (where the yield can be estimated) should have LTCG benefits.

Investor protection and happy citizens should take precedence over tax parity.

Mrun Agarwal is the Founding Director of FinSafe India.