IS IT FAIR? INDIAN TAXPAYERS / SAVINGS CLASS AND THE PROPOSED ROLE OF REGULATORS AND MINISTRY OF FINANCE IN GIVING THEM JUSTICE

WHY TAX INCOME TWICE?
The first issue needing to be looked at is – ‘Why does income become taxable a second time when it has already been taxed ONCE?’ This becomes a matter of greater injustice when the individual (who is a salaried employee) retires and becomes a senior citizen. An employee earns salary income on which he has already paid income tax. He invests some savings in shares, debentures, bank fixed deposits and savings accounts. Why should income from these investments be taxed once again under Income Tax Law? He has paid Income Tax on his salary income. Just because there is a change in ‘Head of Income’, should the income become liable to taxation once again? Is there not a possibility that we are positively discouraging financial savings and perhaps encouraging savings in gold and property?

Why is Income Tax treatment differential – by nature of contributor?
Taking this argument a little further, why do we have an Income Tax differential on interest earnings? An employee invests in PPF / PF which gives him tax-free income at interest rates which are 7.00% +. PPF contribution cannot exceed Rs. 1.50 lakhs in the year. For the year 2021-22, it has been stated that PF interest income on an annual private employee’s contribution in excess of Rs. 2.50 lakhs and a government sector employee’s contribution of Rs. 5.00 lakhs will be taxable. Why this separation of private sector and Government sector employees? What is the logic guiding this differentiation? Why the favouritism to Government employees? Are not all taxpayers equal?

https://economictimes.indiatimes.com/wealth/invest/contributing-over-rs-2-5-lakh-in-epf-you-will-now-have-two-pf-accounts/articleshow/85825052.cms?frm=mailtofriend&intenttarget=no

Why are bank savings and fixed deposit interest rates not at par with other small savings interest plans?
What needs to be understood is why are bank savings and term deposit interest rates so low (between 4.00 – 6.00%) per annum? When small savings interest plans give interest rates around 6.00 – 7.00%, why are bank deposit interest rates so low? Also, except for a very low threshold of tax-free income, these interest earnings are taxable. Can RBI and the Ministry of Finance please explain why bank interest income to the taxpayer has such a low interest rate (and post-tax the rate drops further)?
If the Ministry of Labour is able to get tax-free interest on PF contributions at 7.00+%, why is RBI as regulator failing the bank depositors by accepting rates of interest lower than 6.00% and that, too, as taxable income?

The Table below shows the unfairness of interest taxability for individuals. The RBI and the MOF need to sit down and put an end to this unfairness:

Why are bank savings and term deposits getting such a raw deal on taxability considering that these are the favourite savings options of senior citizens? Net of income tax, these bank interest earnings don’t even cover the consumer inflation rate. Are we not penalising the savings class?

Why are savings and fixed deposits with banks not fully insured?
Another area where the RBI has let down bank depositors very badly is in the security of the deposits made by the individual savings class with banks. As regulator, it is the responsibility of RBI to take care of the interests of bank depositors (savings accounts and / or term deposits). Why cannot RBI mandate that all deposits should be fully insured by bankers? If the Deposit Insurance and Credit Guarantee Corporation of India cannot take the load, let this insurance arena be open to other domestic and foreign insurers. The MOF may need to step into this. If other small savings like PPF, Post Office savings, etc., are fully secured, why cannot deposits with banks be made fully secured (through insurance)?

This issue is a lot more complex on behavioural economics. Rightly or wrongly, Indians believe that their money is fully secured with nationalised public sector banks (PSBs). It would be a huge shock to 90% of individual depositors if they were told that they are secured only to a maximum of Rs. 5.00 lakhs per bank, per individual.

https://cleartax.in/g/terms/deposit-insurance-and-credit-guarantee-corporation-dicgc

This is inherently unfair and the RBI / MOF argument that the current limit of Rs. 5.00 lakhs covers 90% of the depositors’ population is misleading and unjust. Nobody should risk losing a major part of their savings just because effective risk mitigation steps are not taken. It is the responsibility of RBI and MOF to take these steps so that the individual savings class is protected. In my view, this would squarely fall in the RBI’s domain. It is RBI’s responsibility to get matters organised at the Government and Ministry of Finance levels.

Why is SEBI not confronting misuse of the dividend payout option by Mutual Funds AMCs?
Another preferred area of investment by the individual taxpayer is Mutual Funds – Dividend Payout option. This is obviously to get a steady stream of income, particularly by a senior citizen and retired individual.

However, there is a catch in these dividend payouts and SEBI needs to be mindful of the same.

https://www.business-standard.com/article/pti-stories/sebi-directs-the-renaming-of-dividend-options-of-mutual-fund-schemes-120100501347_1.html

What SEBI should address is the fact that the Mutual Fund AMC cannot distribute dividend that is more than the amount sitting in the difference between the market price and the cost of the units. SEBI has recognised that in certain instances there could be return of capital as dividend which is taxed in the MF holder’s hands. This is unfair. The illustration below will explain the position:
(a) Investments into the MF scheme (cost) – Rs. 10 lakhs;
(b) Dividend declared @10% – Rs. 1 lakh worth of units will be redeemed;
(c) Market value on dividend payout date – Rs. 12 lakhs;
(There is no problem in this since dividend payout is less than the MF units’ appreciation.)
(d) Alternatively, the market value on dividend payout date is Rs. 10.75 lakhs;
(In this case, dividend on MF unit appreciation is Rs. 75,000 and Rs. 25,000 is Capital Units redemption, total dividend Rs. 1 lakh).

In my view, this payout of Rs. 25,000 to the scheme’s unit holders by the AMC is wrong. The individual is also being taxed on Capital Redemption as Dividend. SEBI should actually mandate that dividend paid to the MF unit holder cannot exceed the appreciation of units in his folio. Therefore, in the second instance described above (d), only Rs. 75,000 can be declared as dividend, and thus the real dividend rate becomes 7.50% and not 10.00% for the scheme unit holder concerned. This enables the MF unit holder to take a view on continuing or discontinuing his investment in the scheme. In my opinion, SEBI has realised the problem, but needs to take it further for the sake of the individual investor.

Why the regulators must think of the individual as taxpayer and investor
It is the opinion of the writer that the regulators and the MOF must make the individual income tax payer central to their economic and financial plans. Both RBI and SEBI need to be very conscious of their responsibility to the savings / investing class. They cannot operate in the arena taking care only of the interests of banks / AMCs and totally ignore the individual’s interests.

(The author is grateful to the news links that have facilitated his understanding of the subject and helped develop his point of view)