Taking the HRD Minister, Kapil Sibal’s vision forward of revolutionising the education system (primarily school level), in India, Finance Minister, Pranab Mukherjee has laid emphasis on the cause of higher education. FM has announced an increase of Rs 2000 crore in plan expenditure to Rs 9,596 crore besides other sops especially for students from weaker section of the society.
But is this really going to help? Will it really make an impact on the future of students yearning for higher education? Or is it that Government continues to pay lip service to the cause of making higher education more accessible to Indian citizens through easier availability of education loans? Or is it a public relations exercise, which may not have any significant effect on improving access to higher education.
Let’s analyse what students have in store for them:
The Government clearly knows that in education loans it is not the cost of the loans but availability of such loans without requirement of any collateral or a high-income guarantor that is holding back the access.
World over this gap is filled by the Governments funding or guaranteeing loans that are normally given by commercial lenders. The FFSAP (Federally Funded Student Aid Program) of the US government for example ensures that every student who gets admission in any recognized course is able to get a loan though it is not necessarily cheap. But most borrowers do not mind paying commercial rates of interest as long as they do not have to pay anything during the course period and repayment begins after the course is over. Since Government does not want to commit the kind of funds that such a program will require, it has come up with this idea of subsidising the entire interest cost during the course period for students from the economically weaker sections.
This is of course helpful for the handful of economically weaker section students who manage to get these loans from banks, as it will reduce their liability when they actually start paying the loan back after the course is complete. It will unfortunately be of no assistance to the vast multitude of poor students who are unable to get the loan in the first place.
The Finance Minister in his speech has indicated that about 5 lakh students will benefit from this scheme. The number of economically weaker students who are able/eligible to get an education loan from banks is unlikely to be anywhere remotely near this figure. Clearly the Government needs to commit substantial funds to make higher education accessible to the “aam aadmi”.
On the tax deduction relating to interest paid on education loans the definition of the higher education has been changed to provide that the deduction will be allowed for interest paid on loan taken to pursue any course after SSC or equivalent.
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Currently only loans taken for full time graduate courses in engineering, medicine, management or postgraduate courses in applied sciences or pure sciences were eligible for this deduction. This is an excellent amendment as it substantially extends the scope of this deduction.
Of course to be eligible for the deduction the loan needs to be taken only from a “bank” or an “approved charitable institution”. The issue is that banks are willing to provide loans only for a limited number of courses. Therefore to encourage private sector players such as NBFCs to provide education loans the requirement that the loan be taken only from a bank should also be extended to include NBFC’s or other bodies/individuals to make this deduction more meaningful.
The New Pension Scheme:
Another attention grabbing scheme is recently launched National Pension Scheme (NPS) where some of the mist surrounding the tax treatment has now been cleared.
Firstly, the Contributions to this scheme are now tax deductible within the overall limit of Rs 1 lacs and can be made by both salaried as well as self-employed individuals. The income accrued to your account will also be exempt at the time it is earned.
Any withdrawals are fully taxable unless used to buy an annuity policy in the same financial year. Any annuity received under the annuity policy is off course fully taxable. The good thing is that any dividend received by the fund will not be subject to any dividend distribution tax.
Given that the yield on NIFTY is around 1.22% the waiver of the dividend distribution tax would mean an additional yield of 0.25% for the fund on its equity investments. This significantly enhances the return from the equity portion of the NPS. Also since NPS will now not be required to pay any STT on its market purchases of shares and securities it will result in enhanced yields for the subscriber.
But the NPS continues to suffer from the latecomer syndrome. Its problem is that it has been conceptualized and launched after the Government has frozen on the Exempt/Exempt/Tax model of treatment of such schemes. This means that the contribution to the scheme is tax deductible, the accretion of income is exempt but is taxable when the money is withdrawn from the scheme. The existing schemes such as PPF and EPF are exempt at all stages, which means even withdrawals are not taxable. Similarly employers’ contribution upto Rs 1,00,000 to an approved super annuation fund is exempt and the income accrued to the fund is also not taxable and at retirement time the withdrawal of upto 1/3rd of the fund value is also exempt from tax.
Because of this tax disadvantage at the time of withdrawal and the lack of track record on returns it will be relatively difficult for the scheme to take off in any big way. Paradoxically it will be the well heeled savvy investors who might take to the NPS first since the tax advantage of PPF/EPF is available only upto a certain limit and post that the NPS scheme makes eminent sense.
Taxation Sops:
The removal of surcharge benefits for the people who have taxable income over Rs 10 lacs. The minor enhancement in the minimum amount chargeable to tax is too insignificant to make any serious difference.
The biggest thing that will affect loan consumers is the potential for interest rates to rise given the size of the government’s borrowing program. This is likely to increase the attractiveness of the semi fixed rate loans that are being offered by a few PSU banks.
The other big things in the budget are still to be unveiled. The new tax code will be widely awaited and discussed. It is expected to remove most of the exemptions and deductions for businesses and to a lesser extent on personal incomes. The salaried class also waits with bated breath for the amendment in rules that will deal with perquisites in lieu of the removal of FBT. Hopefully the new promised “Saral 2” will actually be Saral.
Clearly we will be seeing a lot of action outside this budget.
(Harsh Roongta is the CEO, Apna Paisa Pvt. Ltd, a price comparison search engine for loans, insurance and investments. He can be reached at [email protected]).
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