More money available to invest after hiking tax slabs

Vivek Law, Consumer Affairs Editor, CNBC-TV18 - Finance Minister P Chidambaram has put more money into your wallet. By hiking tax slabs, the gains from tax saving are enormous, as high as Rs 45,000 per annum, if you earn at least Rs 5 lakh every year. If you earn Rs 3 lakh, then the tax saving is Rs 24,000. Women need not pay tax upto Rs 1.80 lakh income per annum and the figure is now Rs 2.25 lakh for senior citizens. Clearly, more money available to invest.

But that is not all. Add to this, the benefits he has extended through Section 80 D for investment in health insurance products. Earlier you could claim upto Rs 15,000 deduction from your taxable income, on premium towards a health cover. He now says, if you buy health cover for your parents, you can claim an additional Rs 15,000. And it is no longer necessary for them to be dependant on you either. And if your parents are senior citizens, then you can claim deduction of Rs 20,000, on a health cover bought for them. This translates into over Rs 10,000 per annum tax savings, at the highest income bracket of 30 per cent. More importantly, it takes care of your parents' health costs too, and incentivises you as well to buy health cover for yourself, especially considering health costs become a major expenditure from savings in our sunset years.

Now coming to where do you invest the amount he has put into your wallet? He has not touched Section 80 C at all, and that means no additional tax benefits, on investments like ELSS or ULIPs or Government backed investment schemes like PPF, KVP, Post Office savings etc. Moreover, the Rs 1 lakh limit under Section 80 C continues to include school fees for two children as well as principal amount of a home loan. Add to that the provident fund deduction your company makes for you if you are salaried, and there is very little to play around with.

The returns on Government backed investment schemes like PPF, KVP, Post Office savings, remain the same, and all except PPF, bear a tax on the income you earn on maturity, in line with your tax slab at that point.

On the other hand, invest beyond a year in equity---directly or through an equity mutual fund---and your returns are tax free. In fact, he has hiked short term capital gains tax---investment less than a year----to 15 per cent from 10 per cent. In other words, he wants investors to invest more of their savings in equity, and with a long term horizon. It is well accepted globally, investing in equity over long periods of time, not only delivers higher returns than any other asset class, but also minimises risks normally associated with investing in equity.

In my view, It is now going to be even more imperative for every individual to put some amount of his or her money in equity. Either directly if there is an understanding of the stock markets, or indirectly through mutual funds. The amount would of course depend on your risk profile and investment goal. Happy investing!