Budget 2015 focused on igniting growth engine: Vidya Bala

Vidya Bala, Head of Mutual Fund Research, FundsIndia.com

Budget 2015 may not have any big bang reform announcements to showcase to the world. But the proposal, at last in words, means business in terms of strengthening the fiscal position, aim for inclusive development, cut out freebies where warranted and focus on execution. Its budgeted spending also makes the right noises in terms of igniting India’s growth engine by way of increased spending in infrastructure, housing, and urban development by providing itself some additional fiscal space.

The budget may appear to dole out goodies to companies and individuals by way of lower corporate tax and higher deductions for individuals. However, it has, in a less conspicuous fashion, resorted to rationalisation of tax exemptions available for companies, even as it proposes to increases the cost of services that a consumer avails, by increasing the service tax.

Still, for an investor and tax payer, the government has provided an additional Rs 69,600 of exemptions/deductions in the coming financial year. Here are some of the key budget proposals that will have an impact on tax payers and investors.

Impact for investors

Additional deduction for New pension scheme: In a move aimed at encouraging investors to opt for New Pension Scheme, the budget proposes an additional deduction (over and above Section 80C deduction of Rs 1,50,000), of Rs 50,000 under Section 80CCD for contribution made to the new pension scheme. It also plans to enable a legislation that will allow employees to opt for EPF or the NPS. This is effective the coming financial year April 1, 2015.

Besides, the government will soon provide you the option of not contributing to EPF if your income is below a certain threshold. That means, you could instead save the amount in higher yielding options.

Interest exemption for Sukanya Samriddhi scheme: While the Sukanya Samriddhi scheme was earlier declared as being eligible under Section 80C deduction, the budget also proposes to make the interest income from the scheme exempt from tax. This is effective the current financial year of FY-15.

Tax-free bonds: Tax-free infrastructure bonds will once again be made available for projects in the rail, road and infrastructure sectors. However, given that we are in a declining rate regime, investors may not get the kind of rates they did in the past.

Gold Bonds: To provide an opportunity to invest in gold without increasing the demand for the yellow metal, the budget proposes a Sovereign Gold Bond that will earn interest and allow you to redeem it in cash, equivalent to the gold face value.

Impact for tax payers

No more wealth tax but: Effective April 1, 2015, wealth tax will be abolished. However, a 2 percent additional surcharge (that is 12 percent from 10 percent now) for the super-rich, with income over Rs 1 crore will be charged. This would make it easier to collect tax and avoid evasion.

Health insurance: The budget appears to encourage its citizens to get adequate medical cover. For individuals (other than senior citizens), the deduction allowed under Section 80D for health insurance is up by Rs 10,000 to Rs 25,000. The deduction allowed for senior citizens is proposed to be increased to Rs 30,000 (from Rs 20,000). Besides, an additional Rs 30,000 would be available as deduction towards medical expenses incurred by those over 80 years of age. This will be effective financial year beginning April 2015.

Higher transport allowance: Tax payers will now be able to enjoy exemption of up to Rs 1600 a month (from Rs 800 now) for transport allowance that they receive as part of payroll.

Tax neutrality in case of merger of mutual fund schemes: A positive for mutual fund investors is that scheme mergers – within equity funds or within other categories, would not be taxed under capital gain. In other words, such a merger would not be treated as a sale of fund by investors.

Widening the tax net: In a move that will help the Income Tax authorities keep track of money trail, any purchase or sale exceeding Rs 1 lakh will now require disclosure of PAN. Similarly, one cannot accept or repay over Rs 20,000 in cash, for any advance towards purchase of immoveable property.

Service tax: Tax payers will also soon start (date yet to be notified) paying more for all the services that they incur as service tax will soon be increased to 14 percent from the current 12.36 percent. That means a lot of hidden costs as well, such as a higher insurance premium outgo (and many such services which are under the service tax net).