EET will be a smart way for people to build a retirement nest

As the Budget approaches, expect pleas to raise the tax-exempt limit for savings of Rs 1 lakh, called the 80C deduction in tax jargon. Yes, savers should invest more money in financial instruments and the slide in savings due to inflation must be arrested.

However, instead of piecemeal approaches such as tinkering with the tax-exempt savings limit or raising the income-tax exemption limit, the need is to have a holistic way on the taxation of saving instruments.

A rational method was proposed in the original Direct Taxes Code. This version had sought to shelter any saving from tax and to levy a tax only on the income from the saving asset when it accrues. The government should make changes in the DTC Bill to move to this system, known as exempt-exempt-tax (EET).

All savings can then be exempt from tax both at the time of contribution and during the accumulation and growth phase, to be taxed only at maturity, that too if the money is used for consumption.

However, if the money is reinvested in another saving instrument, the reinvested amount should, again, be exempt from tax. Moreover, there need be no limit to such tax-exempt savings. It makes sense to extend the EET principle to capital gains. It will help investors to easily switch assets without attracting any tax, thereby encouraging portfolio churning.

EET will be a smart way for people to build a retirement nest. It will promote efficiency and equity in the tax system, promote investment and growth and generate more revenue over time. It would also put paid to artificial distortions that arise when the government gives a tax incentive to some form of savings while denying it to another.

Finance minister Arun Jaitley should got for such a tax treatment of savings, even if it had been mooted by his predecessor P Chidambaram.