Budget Analysis: Fair play for debt investors

Jitendra P.S. Solanki
JS Financial Advisors

Union Budget 2013-2014 was the most eagerly awaited one considering it was the last budget for ruling party. There were expectations on changing tax slabs, rise in home loan exemptions and many others, which matter most to the small tax payers. But not all fulfilled!!

As far as personal taxation is concerned not much has been done except giving a Rs 2000 credit for income between Rs 2 lakh to Rs 5 lakh which is negligible. There were other measures like increasing housing loan interest deduction limit for some new borrowers availing up to Rs 25 lakh loan which is beneficial. But there were many announcements for debt segment where clear focus was laid down by the finance minister. Some of these benefits directly to the investors while some were taken to deepen the market itself.

Let’s see what has been done in this segment and how does it impact you-

1. Tax Free Infra Bonds- Union Budget 2013-2014 has announced that there will be New Tax Free Infrastructure Bonds of Rs 50000 crore in next financial year. This is a big boost for higher income tax payers who look for options where they can earn a higher post tax return. But, the attractiveness of these bonds will depend on the interest rates offered during the period. We have seen how the rates have fallen from 8% plus to 7-8% this year which may fall further if they decline in future. Still, in comparison to other fixed income products, barring PPF, these bonds gives a good choice for people looking for regular income in the longer term. Some section of investors like retirees and higher tax payers will benefit from this measure.

2. Inflation Indexed Bonds- Gold has been producing superior returns in last few years and considering the rise in inflation, its demand increased to levels which became uncomfortable for the government. This is the primary reason Inflation Indexed Bonds are announced in the budget today. Prima Facie any investment avenue which can take care of inflation for a common man is a welcome move and so if Bonds or national security certificates comes where interest rates gets linked to the inflation will surely a good option to invest. The exact nature of these schemes will be known when RBI finally announces them.

3. Pension and Provident Funds in ETFs- One more move which may benefit investors is that pension and provident funds have been allowed to invest in Exchange Traded Funds and Debt Mutual Funds. Considering these are long term investments, it creates a room for diversification to these funds giving them an opportunity to enhance returns for their investors. What will be the exact structure and how effectively they utilize this will be known in coming years.

4. Dedicated Debt Segment- Any market will like to have long term investors for its sustainability. The Indian Debt Market is suffering from lack of such investors and so allowing pension and insurance firms to trade directly in the debt segment of stock exchanges is a welcome move. These exchanges will be coming out with such dedicated debt segment next year. For investors it may not be an immediate benefit but will surely increase opportunities from this segment in the long term.

5 Surcharge on dividend Distribution Doubled- In another announcement the surcharge on dividend distribution by companies is doubled from 5% to 10%. Although this may increase DDT in Debt Mutual Funds which will lower the dividend received in the hand of investors, the exact impact will be known once the budget fine prints comes out.

Apart from these there was no change in either small savings schemes or introduction of any other opportunity for investors. The budget may not hold positive in many respects but it still gave a fair opportunity to the debt market and long term investors.

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