Does India Need A Tax-Saving Scheme For Education-Related Investments?

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Quality education requires careful financial planning and long-term investment. (Representative image)

Quality education requires careful financial planning and long-term investment. (Representative image)

Tax-incentivised education plans could encourage greater savings and long-term financial planning among the middle class.

The past two decades have witnessed a remarkable transformation in India’s social fabric. The burgeoning middle class, fueled by economic growth and rising disposable incomes, has experienced a significant shift in aspirations. Government schools, once the primary choice for many families, are giving way to a growing preference for private education. This is driven by a desire for the perceived benefits of private schooling. This shift towards self-funded education has a significant ripple effect – a surge in educational costs.

Also Read: Budget 2024: Govt Considers Rs 5 Lakh Tax Exemption Limit In New Regime

Rising costs are creating an urgent need for parents to have a dedicated financial plan for their children’s education and the government can play a pivotal role in incentivising parents to save.

While the expansion of the private sector potentially improves educational quality, it comes at a steep price. The cost of education in India is rising at an alarming rate, significantly outpacing inflation.

Education inflation is at an all-time high (11-12%), with costs doubling every 5-6 years. Today, annual nursery fees can run into lakhs of rupees, and the total cost of schooling from nursery to K-12 can be as high as Rs. 30 lakhs. Higher education is no different.

The average cost of an MBA from a top college has surged from Rs. 8-10 lakhs in 2013-14 to Rs. 20-25 lakhs in 2023-24, marking a rise of over 100%. This trend is particularly concerning for middle-class families, who are increasingly straining under the financial burden.

Quality education, once seen as readily available through government institutions, now requires careful financial planning and long-term investment.

Several developed countries offer valuable examples of incentivising education-related investments through tax-saving schemes. The 529 Plan in the USA provides tax advantages for education savings, the Junior ISA in the UK offers tax benefits for saving for a child’s future, and Canada’s Registered Education Savings Plan (RESP) offers government grants and tax-deferred growth on savings.

The United States 529 plan, for example, has seen over $450B in assets saved for education since 2009. These tax-free investments can be used towards primary and secondary education both. Families can also use these funds on tuition, books, accommodation, and other ancillary services required for education tax-free. In short, these schemes act as a powerful nudge for parents to invest in their children’s education, ensuring long-term financial planning and reducing the burden of future education costs.

Implementing a similar tax-saving scheme in India wouldn’t just benefit individual families; it would also contribute to the nation’s economic health. Data from the Reserve Bank of India shows that India’s net household savings is at a 47-year-old low, hovering at 5% (2022-2023) versus 11% from 2021-2022.

Tax-incentivised education plans could encourage greater savings and long-term financial planning among the middle class. By channelling savings towards a specific goal (education), the government could incentivise a more stable and productive financial future for its citizens.

The benefits extend further. The influx of funds into education-focused investment avenues would be a boon for the mutual fund industry. These schemes could create sticky assets under management (AUM), attracting and retaining long-term investments from parents.

Additionally, monthly contributions towards education plans would foster a culture of regular savings, building financial discipline among a wider population segment. This would not only benefit the families planning for their children’s education but also create a more financially secure future for the nation.

In conclusion, India’s growing middle class aspires for quality education, but the associated cost burden is becoming increasingly difficult to manage. Implementing a tax-saving scheme dedicated to education-related investments can be a game-changer. By drawing inspiration from successful models in developed nations, India can incentivise financial planning amongst families, boost the savings rate, and create a more secure and financially empowered future for its people.

-The author is Co-Founder and CEO, EduFund. Views expressed are personal.

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