Expert advice

Jul 17, 2014,16.06 IST

Positive outweigh negative for retail investors

I’m reminded of my school days, after this budget. I remember a day when I was sent to meet the principal ( a fate any student dreads ).  With dread in my heart & fateful forebodings, I was waiting that day outside the chamber – to be interrogated & be at the receiving end of what is considered justice – a couple of juicy whacks with a thin cane that stung like a scorpion ( I had experienced this before too )! After waiting for 10 minutes, the swing door of doom opened… I imagined the peon would usher me into the death chambers. Imagine my surprise now on seeing the Principal emerge out, smile at me and give me a toffee after which he was on his way with some visiting dignitaries ( who looked like Ram Lakshman to me, for saving my day) !

That poignant scene, etched in my mind’s eye, played out after the budget speech. Our PM had been preparing us for a spot of bitter medicine.  What came was a pleasant surprise for the Aam Aadmi… Our PM seems to be a past master at managing expectations!

Tax surprise :  The Income tax exemption limit has gone up from Rs.2 Lakhs to Rs.2.5 Lakhs, for those below 60 years and the exemption limit has moved to Rs.3 Lakhs from Rs.2.5 Lakhs for Senior citizens.  This means  potential savings of Rs.5,000+ for both these categories.  In inflationary times like the present, this is music to the ears. The super senior citizen category ( above 80 years ) stays, where the exemption limit is Rs.5 Lakhs.

Note that the tax slabs themselves have not changed. Hence, upto Rs.5 Lakhs ( above Rs.2.5 Lakhs of taxable income ), the tax rate is 10%, above Rs.5 Lakhs and upto Rs.10 Lakhs it is 20% and above Rs.10 Lakhs, it is 30%. Education cess of 2% & higher education cess of 1% on the income tax is applicable as before, for all tax slabs.
Save more tax by Saving : There has been a standing grouse that Sec 80C benefit of Rs.1 Lakh is too low as it has in it’s ambit all manner of investments/ options like EPF, PPF, Insurance premium, Principal component of Home loan, ELSS, 5 year Bank FDs etc. There was an expectation that this savings limit will be enhanced to Rs.2 Lakhs. While that has not happened, the FM has not dashed the cup either. He has sought a midway point of Rs.1.5 Lakhs, which would offer some relief to the citizenry. Any relief is welcome and a Rs.50,000/- extra saving potential which would result in a tax saving of Rs.5,000/-+ would certainly be welcome. This means that a normal citizen would be able to save Rs.10,000+ worth of taxes due to the increase in the exemption limit and the increase in the Sec 80C limit alone!

Save more under PPF :  To all the PPF aficionados, FM has some sweet music. He has increased the PPF contribution limit to Rs.1.5 Lakhs per account per year from Rs.1 lakh. That means all of us can earn more tax free income by putting money in PPF. What’s more, PPF comes under Sec 80C. So one saves tax in the year of investment, the income generated is exempt from tax and the final proceeds from a PPF account is tax exempt too.

Status Quo : Other sections like Section 80E ( interest on Education loans), Section 80D (premium contribution towards medical insurance ), Section 80G ( Donations to approved charitable bodies ) have not been touched. Infact, most of the provisions pertaining to personal income tax have not been changed. But hold on… here comes another,  that would warm the cockles of your heart.

Real savings on interest paid :  Property has moved up, up and away.  Citizens have had to take huge loans to buy properties. FM is coming with a handy balm to ease the pain somewhat.  The interest component of the home loan being paid as EMIs, were allowed as a deduction from taxable income under Sec 24B, to the tune of Rs.1.5 Lakhs till this budget.  The FM has increased this to Rs.2 Lakhs, which brings down the interest being paid or helps one to save tax, depending on how you look at it. Assuming that an individual is taking advantage of Sec 80C completely, and is also taking advantage of the entire Rs.2 Lakhs deduction here, then the tax savings would be higher as a part would have gone into the 20% slab otherwise.

The bouncer for non-equity MF schemes :   There was this nasty surprise for Debt MF investors. The Longterm capital gains ( LTCG ) were increased from 10% to 20% without indexation. The other option was 20% with indexation, which is what exists now. Also the tenure for availing LTCG has increased from 12 to 36 months. This has implications for investors.

The tenure upto 12 months does not pose problems. In any case investments in liquid funds and Ultra ST funds were done to take care of Short term liquidity or provision requirements, it was already known that Shortterm capital gains would be at one’s marginal tax rate.  These funds generally offer equal or better returns as compared to shortterm FDs.

For tenures over 3 years, the 20% after indexation does not change things much. These investments would be for meeting longterm goals and no change is required here.
In the one to three year period, debt funds used to offer excellent post tax returns. The effective tax incidence used to be between 5-7% only. Now, the taxation would be at one’s marginal rates. Hence, debt funds will offer similar returns like FDs.  Those who want fixed returns and are reasonably sure as to when the money would be needed, can look at FDs. Others who are willing to stomach the volatility in debt funds and but want the flexibility to cash out whenever they may need, can look at debt funds. Debt funds should very nearly match the returns of FDs. There is one advantage that debt funds do have -  in a falling interest rate scenario, there could be some capital gains, which will push up the returns.
FMPs were once a vehicle of choice for getting almost assured & excellent post-tax returns in the one to three year period. Now, FMPs of one to three year tenures would stop. FMPs with tenures above three years would continue to exist, but will not be very common.
Arbitrage funds are coming into the limelight now as they are equity funds but have the risk profile of a debt fund as the positions taken are fully hedged. Since they are equity funds, the returns after one year are entirely taxfree. This is a viable option. But a lot depends on arbitrage opportunities being available.

In all, the positives outweigh the negatives in this budget. It could have been a lot worse given that our PM was giving indications of administering the bitter medicine.  On the whole, the FM has distributed sweets and has swung the cane, ever so lightly. Like the Principal I encountered, our FM had been kind this time. Count your blessings and make the most of it. Who knows how the next encounter will turn out?

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