By Vishal Shah

Clearly the Finance Minister (FM) P Chidambaram has played a Santa in the month of February. Whilst, undoubtedly, he would have had vested interest in wooing the votes for the 2009 general elections, the goodies extended are simply very attractive. 

Income Tax Slabs

Upfront, the income tax slabs have been realigned in absolute favour of the individual tax payers. The basic income tax exemption limit has been enhanced from the current Rs 110,000 level to Rs 150,000.  Also, the highest tax rate of 30% (plus surcharge and cess) would now be triggered only once the total income (net of all investment deductions, etc) goes beyond Rs 5 lacs. 

Simply speaking, this translates into a whopping tax saving of Rs 45,320 for an individual having a taxable income of Rs 5 lakh. For the women and senior citizen taxpayers with the same income, this translates into savings of Rs 44,805 and Rs 39,655 respectively, from the current levels. 

Medical Premium Deduction

Over the last few years, there has been an increase in the premia cost for buying a mediclaim policy. The Budget seeks to partially offset this additional cost by allowing an enhanced deduction under Section 80D of the Income Tax Act, of upto Rs 30,000, instead of the current limit of Rs 15,000. 

The additional benefit of Rs 15,000 is available only where the premia is paid for keeping in force the medical policy for the individual’s parents. In case the parents are senior citizens, the maximum benefit can be claimed upto Rs 35,000 (provided the amount paid towards the parent’s premia is Rs 20,000).  The additional deduction would also go to reduce the tax deduction for salaried taxpayers.

It now pays to take good care of your parents.   

Additional Investment Deduction

An individual can claim deduction of upto Rs 1 lakh for investments in instruments specified under Section 80C of the Income Tax Act.  The Budget has now extended the said benefit for investments in 5-year deposit with the Post Office. Generally, the said deposit carries interest of around 7.5% per annum and hence, has not found favour with investors. Even now, with other investment avenues available for deduction under Section 80C, which carry higher interest returns, this is unlikely to lure many investors who fall in the higher tax bracket. 

For senior citizens, now, investments made in Senior Citizens Savings Scheme would also qualify for deduction under Section 80C. Generally, this scheme earns interest of approximately 9% per annum and also does not entail deduction of tax at source. 

Reverse Mortgage Scheme for Senior Citizens

Banks have recently introduced the above scheme to extend loan facility to senior citizens on mortgage of properties owned by them. The Budget has sought to clarify that the loan funds received under such scheme (upon mortgage of the property) would be totally exempted from income tax, in the hands of the senior citizen. Thus, there should not be any tax liability whatsoever, at the time of availing such a loan facility. Subsequently, though, if the property is ultimately transferred at the time of recovery of the above loan, the individual would be subject to capital gains tax. 

What’s Costlier and Cheaper?

The slew of excise and other duty cuts are also expected to lighter the family’s budget for some of the essential items. To illustrate, condensed and processed milk, tea, coffee, cornflakes as also the “sweet sharbats” are now expected to be cheaper following the budget announcements. Also, your medical bill is likely to go down with reduction of duties on various drugs, both imported and Indian. 

If you are thinking of buying your first dream car or 2-wheeler, just go ahead.  The budget announcements are expected to result in a potential reduction in cost of small cars in the range of Rs 10,000 - 12,000 and of 2-wheelers, by a thousand bucks. 

Mobiles, though, are expected to become marginally dearer from tomorrow. 

Investments

If there has to be one dampener for the individuals in this budget, it is the hike in the short term capital gains tax rate on investments in listed equity shares and mutual fund units to 15% (from the existing 10%).  Long term capital gains on such investment continue to remain exempt. As the FM said, its time to go long on your capital market investments. 

To sum up, with the greater social focus - be it on healthcare or education, the Budget is all set to improve the general standard of living. However, with a slew of populist measures introduced, whether this could have an upward inflationary bias needs to be seen.

This author, Vishal Shah is the senior manager of Pricewaterhouse Coopers.