Budget 2015 – What it holds for you

Budget 2015 may not have any big bang reform announcements to showcase to the world. But the proposal, at least in words, means business in terms of strengthening the fiscal position, aim for inclusive development, cut out freebies where warranted and focus on execution.

The 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 as well as excise duty.

Still, for an investor and tax payer, the government has provided an additional Rs 69,600 of exemptions/deductions in the coming financial year. Of this, a chunk comes from deduction for additional investment in NPS (Rs 50,000),  increase in transport allowance exempt (an increase of Rs 9600) and increase in premium deduction allowed towards health insurance (increase of Rs 10,000).

Do look out for our 3-part series on our blog on what the budget holds for:

–          Tax payers and investors

–          Different sectors

–          Economy as a whole

This is the first part on the budget’s 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. This is effective the coming financial year April 1, 2015.

It also plans to enable a legislation that will allow employees to opt for either EPF or the NPS. The date for this is unspecified and may take time as it is not an easy move for companies to provide multiple options to its employees.

Besides, the above, the government will soon provide you the option of not contributing to EPF if your income is below a certain threshold.

What we think: We will, soon let you know whether NPS makes for a great retirement option for you, its tax incentive notwithstanding. As for the option for not going for EPF if you are below a certain income threshold, it means you can either have more money to take home or 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.

What we think: You can view this as an alternative long-term option to recurring deposits. However, do not confuse this with far higher yielding options such as equity and balanced funds offer. Their superior returns means that you may still have to keep that as a core of your child’s long-term portfolio and at best supplement your debt part with products such as Sukanya Samriddhi.

We will at a later date, provide you a returns chart on how your returns (based on past data for RD and MFs) stack up under various options – Sukanya Samriddhi, RD and mutual funds.  

No hassle of PIS for NRIs

NRIs could invest in equities after approval under the Portfolio Investment Scheme thus far. This was a hassle and delayed an investor from opening a demat account and investing. The government may soon do away with PIS, thus making it hassle free for NRIs to invest in the equity market.

Tax-free bonds back again

Tax-free infrastructure bonds will once again be made available for projects in the rail, road and infrastructure sectors.

What we think: However, given that we are in a declining rate regime, investors may not get the kind of rates they did in the past. Hence, unless you are a retired person or somebody looking for regular source of income, these bonds may not provide you with optimal returns.

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.

We shall comment on this product once the contours of the same are known.

Impact for tax payers

No more wealth tax but..

Effective April 1, 2015, wealth tax will be abolished. However, a 2% additional surcharge (that is 12% from 10% 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.

The tax authorities are also set to ensure that the tax returns are modified to ensure sufficient details about a tax filer’s wealth is still disclosed, even after wealth tax abolition.

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.

What we think: While the move per se, appears to provide investors with more leeway, most investors get a decent health cover at around Rs 10,000. Hence, make sure, you do not unnecessarily buy policies simply because the limit is available to you. You may be better off investing surplus in high yielding investment options.

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.

What we think: This is a positive for all mutual fund investors. For one, any merger shall not be treated as sale. Two, the date of purchase will be the date of the investor’s original purchase, before any merger. Hence, for any capital gain purpose, it will likely favour the investor.

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.

What we think: It is best not to go for cash dealings as far s possible. And do not try to cover up large value transactions as PAN is an easy link for tax authorities to follow. In simple words, keep your transactions transparent, and pay taxes where it is required.

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% from the current 12.36%. 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).

What we think: Yes, services are set to be more expensive and this is inevitable as the country moves to GST – the impending indirect tax law. In a way, these would be hidden inflation for an individual. More reason why you need to save smart to beat inflation!