Indian Economy Q&A Analysis – Park money in Financial Assets


In India, both investment and consumption are largely driven by households. Household consumption accounted for 59.4% of the GDP in 2016, according to the World Bank.

Total savings, which are vital for investment, amounted to 32.5% of the GDP, of which household savings alone contributed 23.6% to the GDP, according to NITI Aayog.

Why people do not show much interest in financial assets:-

Indian savers prefer to bet their surpluses on physical assets such as gold or property, instead of in productive financial assets such as deposits, bonds and shares.

Tax laws encourage leveraged investments in a property by allowing tax deductions on both the principal (Section 80C) and interest repayments (Section 24B) on home loans. But when it comes to financial investments, many popular avenues (bank and post office deposits less than five years, recurring deposits, bonds) receive no tax breaks even on the actual investment.

Property investments also enjoy more generous capital gains exemptions than financial products. Capital gains earned on selling the residential property after three years is not taxed if you reinvest the proceeds in another house. But this reinvestment benefit is unavailable to financial products.

Capital gains tax rules for financial products are complex

Flexibility to choose the tax-saving instruments is restricted. There’s a restrictive list of ‘approved’ 80C investments that has grown over the years and it distorts choices for savers.

Present tax laws ignore individual risk-taking ability and try too hard to push investors towards equities.

Tax procedures are very complicated. If a company goes bankrupt, its shares are worthless and any debt it owes may be unrecoverable. The rising volume of non-performing assets indicates that corporate India is struggling to service debt obligations, which means the corporate debt is high-risk.

Ideas to encourage citizens are:-

Instead of micromanaging savings under 80C, it would be good if the government did away with the approved list and offered just one deduction for financial investments. That would allow savers freedom of choice based on individual goals.

Increasing financial literacy of people is the first and foremost thing which is necessary

Treat equity gains as ‘long term’ only after three years.

Fraudulent companies shall be dealt with appropriately to develop popular trust.

In order to promote stock market knowledge among the retail investors, there is a need for promotional activities like TV shows, AD campaigns, documentaries providing information about scheme such as Rajiv Gandhi Equity Savings Schemes (RGESS) wherein new investors can be attracted towards the capital market.

To establish a level playing field between physical and financial assets, sale proceeds from financial assets, if held long term, should be allowed to be reinvested without capital gains tax.

A uniform definition of ‘long-term’ and cost inflation benefits for all financial products, whether they are bonds or bank deposits, would render them more attractive.

It would be desirable to tax both dividend and interest income at similar rates in the hands of investors. .

Holding of trade fairs for promoting capital markets in tier II & tier III cities is required. This is another method wherein most of the banks, Non-Banking Financial Corporations (NBFC) and broking companies can put up their stalls and a large number of investors can be attracted for such fairs through media campaigns.

The social media platforms especially FaceBook, Twitter, LinkedIn along with e-groups and websites can spread awareness about various options available for the investors in the present market situation. The investor education can play a vital role in improving the active participation of the investors in the market which can help them in the informed investment and in getting good returns.


These measures above will not just nudge savings behaviour closer to the policy objectives. They will also make financial products vastly more appealing to savers, by uncomplicating the tax rules that presently hamper their freedom of choice.