Indian families will pay a lot less for their groceries, insurance, clothes, cars and other products from September 22 if companies pass on the benefit of lower goods and services tax (GST) to consumers.
While the government’s overhaul of the GST regime is aimed at giving a fillip to consumption ahead of the festival season, you would do well to direct a part of your additional savings towards investments. You can consider increasing your systematic investment plan (SIP) amounts in mutual funds and also invest in international mutual funds and gold ETFs.
Lower expenses after September 22
It is important to estimate the reduction in your monthly expenses. According to calculations by Taxconnect Advisory Services Partner Vivek Jalan, a family with a monthly budget of Rs 80,000 could save around Rs 1,639 a month when the new GST regime comes into force from September 22.
For arriving at an estimate, Moneycontrol assumed that the family spends Rs 20,000 on food and groceries, which will go down to Rs 18,750 after September 22; Rs 8,000 goes towards paying utility bills, Rs 3,348 towards life and health insurance premiums (could dip to Rs 2,837) and so on (see graphic).
| The household budget reset: Indians set to save more post GST revisions | |||||||
| Monthly budget | Rs 80,000 | Rs 3 lakh | Rs 10 lakh | Remarks | |||
| Spend categories | As per current GST rates (Rs) | Post-GST revision (Rs) | As per current GST rates (Rs) | Post-GST revision (Rs) | As per current GST rates (Rs) | Post-GST revision (Rs) | |
| Food/groceries | 20,000 | 18,750 | 45,000 | 42,187.5 | 80,000 | 75,000 | Most food products will be moved from the 12% slab to 5% slab; post GST rate cut impact is computed accordingly |
| Utility bills | 8,000 | 8,000 | 20,000 | 20,000 | 50,000 | 50,000 | No GST rate reset for utilities |
| Insurance (life + health) | 3,348 | 2,837.29 | 4,579 | 3,880.51 | 11,401 | 9,661.86 | All individual life and health insurance policies will be GST-exempt from September 22 (GST on term and health insurance premiums down from 18 percent so far) |
| Clothing | 4,000 | 4,107.14 | 15,000 | 15,401.79 | 40,000 | 41,071.43 | Calculations assume that 50 percent these expenses constitute apparel exceeding Rs 2,500 (moved from 12 percent to 18 percent) and the balance 50 percent comprise clothing worth less than Rs 2,500 (no rate change) |
| Dining out | 5,000 | 5,000 | 30,000 | 30,000 | 80,000 | 80,000 | No rate change |
| Miscellaneous expenses | 6,000 | 5,746.88 | 45,000 | 43,101.56 | 2,00,000 | 1,91,562.50 | Assumed that 30 percent of this expense head moved from 28 percent to 18 percent; another 30 percent from 12 percent to 5 percent and 40 percent would remain unchanged |
| Rent/EMI | 20,000 | 20,000 | 50,000 | 50,000 | 1,50,000 | 1,50,000 | No rate change |
| Transport | 5,000 | 5,267.86 | 20,000 | 21,071.43 | 50,000 | 52,678.57 | Passenger transport (air-economy/car hire) -- moved from 12 percent to 18 percent |
| Savings/investments* | 8,652 | 10,290.84 | 70,421 | 74,357.21 | 3,38,599 | 3,50,025.64 | No GST impact |
| Net impact* | Rs 1,639 | 3,936 | 11,427 | *Net impact amount subsumed into savings/investments | |||
| Source: Computation by Vivek Jalan, Partner, Tax Connect Advisory Services LLP | |||||||
| Notes: 1. Assumptions for computing GST impact on insurance premiums for the three disposable income groups: Impact of input tax credit hurdle not taken into account; figures for a 30-year-old couple buying ICICI Pru Life's 30-year term insurance plan with combined coverage of Rs 1-crore (Rs 80,000 budget), Rs 3.5 crore (Rs 3-lakh budget) and Rs 12 crore (disposable income of Rs 10 lakh) as well as Niva Bupa's family floater (couple plus one kid) with unlimited sum insured; source: Policybazaar.com and Niva Bupa's website. 2. Figures pertaining to groceries, utilities, dining out and other spend categories are Moneycontrol's assumptions to illustrate the impact of GST revision |
These premium figures pertain to a 30-year-old couple buying life cover of Rs 50 lakh each (total coverage of Rs 1 crore) with a 30-year term and an unlimited health insurance family floater to cover themselves and their kid. Clarity is yet to emerge on whether insurers will pass on the entire rate cut benefits to policyholders, as their operational expenses could go up due to the possible unavailability of input tax credit.
Also read: GST exemption on insurance: Policyholders might gain despite likely base premium hikes in future
“Most food products will move from the 12 percent slab to the 5 percent slab from September 22. So, the likely post GST rate cut impact is computed accordingly,” Jalan said.
If a family’s monthly budget is Rs 3 lakh, the savings would be a bit higher at close to Rs 4,000. The amount saved can vary as per the composition of the family’s budget. Moneycontrol has pegged food and grocery spends pre-GST cut at Rs 45,000, life and health insurance premiums at Rs 4,579, clothing at Rs 15,000 and so on.
Food and grocery expenses could dip to Rs 42,187, as per Taxconnect’s calculations, while insurance premiums could inch downwards to Rs 3,880 per month. The premium figures are computed assuming that the 30-year-old couple buys term insurance covers of Rs 1.75 crore each (so total cover of Rs 3.5 crore), besides an unlimited family floater policy to cover themselves and their kid.
For those with higher disposable incomes and monthly budgets as high as Rs 10 lakh a month, savings can go up to around Rs 11,400 a month. The assumptions here are that expenses on food and groceries amount to Rs 80,000, which will drop to Rs 75,000, while term and health insurance premiums will come down from Rs 11,401 to Rs 9,661 a month. This is assuming that a 30-year-old couple buys a term insurance cover of Rs 6 crore each (total cover of Rs 12 crore), and an unlimited sum insured health policy to cover themselves and their kid.
Use GST savings wisely
Whether your savings are minuscule or significant, do not forget to review your investment strategy and plan expenses ahead. With many products becoming cheaper, and brands raining offers and discounts during the festival season, you could be tempted to make more unplanned purchases.
“The choice is theirs – whether they want to spend or save more. You will buy what you have planned to but that cheaper products and higher savings do not mean you should increase your budget to buy what may not be necessary. If your spending budget was Rs 100 and you are able to buy the same products in, say, Rs 90, you need not use the balance Rs 10 to buy something else. Logically, you should invest this amount,” said Pankaj Mathpal, founder, Optima Money Managers.
The festival season is indeed a time to celebrate, indulge and loosen your purse strings but ensure that you take stock of and boost your savings first. Even a small amount invested every month in a large-cap equity mutual fund or gold ETFs through the SIP route can create a substantial corpus over the long term. Invest additional money according to your asset allocation plan rather than going on a spending spree.
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