Days of exemptions are over

If you are one of the millions of Indians who invest their savings primarily with an eye on saving tax, your life has changed forever. The key message coming out of Finance Minister, Pranab Mukherjee's budget is-days of exemptions are over, start doing your own financial planning. And that's not all. If you have been averse to equities, it's time you started steeling up your heart to put aside some part of your savings in equity directly or better still through mutual funds or unit linked insurance plans (ULIP).

This is why, he has, perhaps for the first time in recent years, left exemptions on investments, untouched. Moreover, he has stated explicitly, his resolve to move to an era of no exemptions but lower tax rates. This means, I will give you more money to keep but you decide now how to invest it. For starters, this year people earning over Rs 10 lakh get to keep 3 per cent of the tax paid, through removal of 10 per cent surcharge. For the rest, the tax slabs have been hiked, but almost negligible, giving a benefit ranging from Rs 1,000 to Rs 3,000. And yes, fringe benefit tax (FBT) has been abolished (though there remains confusion on the extent of it), so you get to pay less tax, as many perks and allowances, will no longer be taxed. So, while one hopes he will lower tax rates next year, for now its time to focus on enhancing returns on investments. He has left rates of interest on small savings untouched, and given no further exemptions under Section 80C, which in any case, meant little as it clubbed your child's education fees, your home loan principal repayment, provident fund deducted by your employer and all other investments you made in equity linked savings schemes (ELSS), small savings, ULIP etc, within the Rs 1 lakh basket. Except for public provident fund (PPF) (in fact, he has rather strangely even kept new pension scheme out of it), where the returns you earn on maturity are tax free, all other "safe" investments, tax your returns. In contrast, equity-direct and through mutula funds and ULIP earns you tax free income if you remain invested for a year. Yes, he has kept long capital gains tax exemptions intact. The primary aim of investing is to see your wealth grow. And now that there is unlikely to be any further incentive in the form of tax benefits upfront when you invest your money, your focus has to shift to ensure as much of the wealth you have built over the years, comes back to you rather than going into the government's coffers. In other words, the focus of your financial plan has to shift to building wealth and not saving tax. Of course, you have to invest in equity only to the extent of your risk appetite. And do so keeping a long term view. But do so, you must. That is the underlying message of Budget 09 for your wallet.