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Opinion

Budget Wish: My Empowered Retirement Account (MERA)

Mera.jpg

It’s time for Indian investors to get a real retirement account for really long term investments. This is an account in which you can save money, sell and buy different financial instruments, and only pay tax on that money when you take it out.

Why?

In general India has “safe” and “total” tax saving measures – you can save tax when you put in money (into EPF or PPF or insurance for instance) and when you take it out, there is no tax either. But because of potential large amount of misuse, we’ve restricted this to number of 150,000 rupees under 80C for input tax saving.

These instruments are safe. They have their place. But instead of expanding 80C to a larger number it would be better, in my view, to encourage Indians to take more active participation and risk into their hands.

Plus, the problem is: we’re not actually helping people save for retirement. An ELSS fund is locked in for only three years. A fixed deposit that’s tax-efficient is a five year lock in. NSCs are five or six years. Even a PPF is only 15 years. (the exception is an NPS or the EPF, which are locked out till retirement) Locking you to products is not a good idea – because people need to be able to manage their risk as well. Instead, let’s create an account where we can buy or sell and that process doesn’t have any taxation until we actually take out the money.

The Indian Retirement Account : MERA

Let’s give it a name: MERA. (My Empowered Retirement Account)

The concept is this:

  • You put money into this MERA account (bank account+demat combination)
  • Whatever you put in is not taxed as your income
  • You can buy any demattable financial instrument with it (Stocks, bonds, mutual funds) into your demat account
  • You can sell and use the proceeds to buy other financial instruments.
  • But you cannot take money out easily
  • If you take money out, you are taxed at TDS of 10% on the money, plus you have to add the total amount taken out as income in you taxes.

This can be done easily with our current setup.

The demat depositories are NSDL and CDSL – they can create separate types of demat accounts for MERA, based on PAN, with a MERA body as a participant. Alongside, a bank account is also created in the name of the individual, automatically. The person cannot operate this account – she can only transfer money into it from other bank accounts.

MERA bank and demat accounts cannot be pledged, and no loan can be given against them.

Brokers will then bid for your service, at a price per trade basis. Say Rs. 10 per trade. There is no margining. There is no leverage. You can only buy after the money is IN the MERA account. The broker will provide you an interface or software to buy and sell.

You can then use the broker’s interface to buy or sell from your MERA account. You can change brokers when you want – the underlying account remains the same. You do not need to give a power of attorney – the stock enters or leaves your demat account directly to the exchange. (No broker pool account etc.)

Ground Rules

Some simple rules for the retirement account

  • An upper limit of Rs. 500,000 per year can be added to the account.
  • You simply do a NEFT, IMPS or RTGS transfer to your own MERA bank account
  • When the money hits the account, you can use it to buy – either mutual funds (sit in the demat), or bonds, or stocks.
  • Stocks and funds can initially be restricted – top 500 NSE/BSE stocks and high
  • Interest and dividends come to the MERA bank account. Again, you can’t withdraw it, but it’s not taxed as long as it’s in there.
  • When you sell, the money will come into your MERA bank account. But after two days. So until then you don’t get to buy anything else.
  • No intraday trading, and no leverage/margined trades like futures/options.
  • No capital gains tax on profits made in this account.
  • Even if you keep cash in your account, it’s a savings bank account in your name, you’ll earn the interest. (“Float” interest isn’t earned by other people – float is a well established way to abuse long term systems)
  • All withdrawals see 10% TDS. And reported to taxman, so the amount withdrawn is added to your income.

This is a basic set of operational rules. The devil remains in the details, but the essence is to have no settlement risk (risk of buying but not paying etc), no leverage, no pledging/loan, and the ability to exit with a cost.

Advisory Framework

It’s unlikely everyone can manage their own money well. So I’d even propose two things:

  • Standard profile: By default, a person can choose a 20% index fund and 80% government bond portfolio. This can be auto deployed automatically as cash comes in, if a user doesn’t want to choose where the money goes.
  • A fee-based advisory framework for MERA accounts: a SEBI registered advisor should be able to provide advise and help with the transactions of people, with a fee that’s charged once a quarter from the individual’s MERA account. Fees can have caps that are based on slabs (any higher fees will have to be paid by the investor directly)

This is partially what the NPS is, but the NPS forces you to buy an annuity on maturity, and you can’t choose what you buy. I would be happy to buy government bonds for the debt component for the long term, and let it compound over time, without taxes impacting it when it grows. When I need to exit, I’m happy to pay the tax, because I’ll withdraw a little at a time and the rest grows without tax.

The advisory framework allows for external advisors to help with allocations, but to not actually touch your money. And an inbuilt, auctioned fee so you don’t have to negotiate separately.

Impact and Way Ahead

The impact on government taxes is relatively small with only Rs. 500,000 per individual allowable. There’s no government protection for the risk of course, which is good because it enables people to take risks. And then, it can pave the way to restrict NSC/PPF to even smaller numbers (for the illiterate or the very poor) and make people take charge of their long term future instead.

And then, we don’t lock people into products. Don’t like something? Sell, buy something else. You can see the impact of too many transactions (it will hurt you). You will also see lower taxation on really long term investments – and now, you can even have a 20% capital gains tax on regular investors, but no such tax will apply on MERA accounts. The retirement savings are untaxed until exit.

This will be bad for mutual funds, perhaps initially, but over time inflows should get stronger. The idea makes sense with a simpler tax code itself. It can easily be done in our system today.

This may sound unlikely today. But it’s my wish for the future, and I hope it (or something like it) happens.

Our goal shouldn’t be to promote equity or safe cultures. The idea is to promote saving for retirement, and to reach that goal, you need to have different risk taking abilities on a per-investor basis, and thus, a retirement account per person that can invest in different ways based on who that person is.

I’m @deepakshenoy on twitter, for comments or feedback.