The debate on how savings and investments should be taxed seems to be drowning in an alphabet soup. After the Budget move to tax the employee’s provident fund, there has been much erudite discussion on whether EET or TEE is the best regime for savings from a public policy perspective. From the saver’s perspective though, this discussion is wholly academic. Over the years, tax laws for Indian saving and investment products have become so convoluted that they can no longer be slotted nicely into three-letter acronyms.
E or T?
Take the case of the simple bank deposit, the default option for every retail saver. While your initial deposit is fully taxable in vanilla products, there’s a special breed of ‘tax saving’ FDs that exempt your initial investment from tax (under section 80C). Interest on all FDs is taxable at your income-tax slab, but with a caveat. No matter which tax slab you belong to, you will receive your FD interest only after a mandatory 10 per cent TDS cut. Low-income investors need to submit a specified form to the bank to avoid this tax. Given all these ifs and buts, how would you classify the tax regime for fixed deposits — Optional E, compulsory T and E?
When tax rules for a simple instrument like a bank deposit can be so convoluted, imagine the possibilities for products like stocks, mutual funds and pension schemes.
Ad hoc rules
Tax rules for savings and investment products in India have gotten so complicated mainly because they have been tweaked repeatedly over the years, without any overarching policy objectives to guide these changes.
Therefore, we have had one government, buffeted by a bear market, fancying that retail participation in equities needs a push, and exempting all equities from long-term capital gains tax. Another thought that the economy needed a construction stimulus and granted big tax breaks on home loans. Yet another was sympathetic to bankers and decided to withdraw some tax breaks for debt mutual funds.
