It is now official that Finance Minister Arun Jaitley will return from the US later this week, in time to present the Budget on 1st February. While this is an interim Budget, it is also widely believed to be an “Elections Budget.”
This means that many experts expect the government to woo the middle class by providing income tax sops. There are news reports about the income tax exemption limit being hiked from Rs 2.5 lakh to Rs 5 lakh or the Section 80C limit increased to Rs 2.5 lakh from the current Rs 1.5 lakh.
We can only wait and see if these things will actually materialise or not, but smallcase Co-founder and Head of Investment Products, Anugrah Shrivastava has a very interesting and important proposal for the Finance Minister.
Allow 80C deductions on Nifty ETF investments
We believe that ELSS funds shouldn’t be the only mutual funds that are eligible for tax deductions under Section 80C. Investments made in large-cap ETFs should also be allowed to save tax under this Rs 1.5 lakh umbrella.
Passive investing instruments like ETFs have numerous advantages over actively-managed equity funds like ELSS funds. The considerably lower expense ratio is a major benefit that will allow investors to pay less in fees while saving on income tax.
Moreover, recent data has shown that passive instruments like ETFs have beaten actively-managed equity funds. The latter has struggled to generate alpha in volatile markets. If we look at the average 1-year and 3-year returns of the ELSS category ( -8.44% and 13.81%) and compare it to the Nifty (0.12% and 14.42%), we see that passive investing has beaten active investing.
Investment stalwarts like Warren Buffett have also been proponents of passive investing. Even globally, passive instruments like ETFs find favour over active mutual funds. This trend is slowly being seen in India as well. ETFs now account for 3.94% of the total equity AUM
of the fund industry, up from 1.2% in January 2015.
Including ETFs in the tax-saving framework would be a win-win for the government, the broader markets and the investors. First-time earners who are also new to the equity markets would prefer to begin their tax-saving journey with a low-cost, passive instrument that is also easier for them to understand.
Hence, the Honourable Finance Minister should consider adding passive equity-oriented instruments like ETFs under Section 80C in this year’s Budget.