Budget 2012-13: A lukewarm budget for Investors

Budget FY2012-13 has come out today without any big reforms, which completely disappointed both, the participants of equity and debt market. This was the last chance for the finance minister to take some bold steps on the reforms side before facing/going to the elections in 2014. However, the UPA government decided to play the game safe by mostly addressing the problems of fiscal slippage, infrastructure, bottlenecks, and supply side issues in managing inflationary expectations. In this scenario, the purpose of this article is to throw/shed light on some of the measures taken in the budget, which will have an impact on aam janta/aadmi and the implications for their investments.

As for the retail investor, the announcement relating to direct tax measures like enhancing the exemption limit for taxpayers from INR1,80,000 to INR 2,00,000 along with increasing the upper limit of 20% tax slab from INR 8 lakh to INR 10 lakh will look good on paper. However, in reality/ in the broader picture, considering the fact that the excise duty and service tax has been increased, means that the investors are actually going to pay more for meeting their normal expenses.

There has been a lot of uncertainty doing rounds in the minds of investors regarding the implementation of DTC, as instruments like ELSS and FMPs which has been the favorite tool for parking/stashing retail money in the fixed income space in the last 2 years were supposed to be affected. However, the Finance Minister clearly stated today that the DTC will be implemented very soon after the examination of the report of the Parliamentary Standing Committee. We are of the view that in this scenario, investors can continue making investments into ELSS and FMPs without losing their sleep thinking about the timing of the implementation of the Tax Code.

Another interesting point made/presented in the Budget relevant to investors was that a deduction of upto INR 10,000 will be allowed for interest from savings bank account. Although, the saving bank rate has been de-regulated, we actually need to see how banks are going to manage the rates in different interest rate scenario. We have always been of the opinion that investors who are having idle money lying in savings bank account should consider ultra short term funds from the mutual fund space, on the back of the high returns and from a tax efficiency point of view. This measure taken in the budget is definitely aimed at channelizing more savings into the savings account. However, we continue to stick to our view that investors who need more tax benefits can look at other alternative options like infrastructure bonds or other savings instruments and continue parking their surplus in ultra short term funds. The tight liquidity conditions prevailing in the economy along with the fact that RBI might continue with their hawkish stance for some more time makes ultra short term funds attractive from a 3-6 months perspective.

The government has also announced measures like tax free bonds of INR 60,000 for financing various infrastructure projects which means that more issuers will come out with such bonds and this will allow retail investors to actually participate in the infrastructure story.

Another measure that was announced today was the launching of Rajiv Gandhi Equity Saving Scheme, which allows tax deduction of 50% to investors who invest upto INR 50,000 directly in equities, having a lock in period of 3 years. However, the catch in this scheme is that it is aimed at investors whose annual income is below INR 10 lakh. We are of the view that the Mr. Mukherjee shouldn