Posted On Monday, Feb 29, 2016
The Finance Minister presented his leap year Budget in Parliament today. This year’s budget focused heavily on rural and agricultural sector; no path-breaking reforms have been announced. This did not take us or the markets by a huge surprise given the fact that there was less build-up of expectations this year.
As such, budget announcements do not alter the economy or your investments. Quantum is “famous” for exhorting our investors to ignore the budget. We stand by that, that an annual summary of the Union Government’s accounts and the projections for the next year should not affect your long term financial goals. However, having said that, you would still be eager to know what announcements were made that might lighten your tax burden a little.
The Nine Pillars*
The Finance Minister identified nine pillars for having a “transforming impact on the economy and life of people”. The budget touched upon these 9 areas of improvement, which are as given below:
1) | Agriculture and farmer welfare with an aim to double farmers` income in the next five years |
2) | Rural sector |
3) | Social sector including healthcare |
4) | Educational skills and job creation (To make India a knowledge based and productive economy) |
5) | Infrastructure & Investment |
6) | Financial sector reforms |
7) | Governance and ease of doing business |
8) | Fiscal Discipline |
9) | Tax reforms to reduce compliance burden |
Sadly there was nothing concrete for these pillars to hold on to. Here, we share with you the highlights of some of the proposals which the FM made in his Budget Speech, which could affect your personal finances.
Taxation
The tax outgo of lakhs of middle-class tax-payers would come down by Rs 3,000 each as the FM has raised the ceiling of tax rebate under Section 87A to Rs. 5,000 for individuals with net income less than Rs. 5 lakhs. For instance, if your tax liability in 2016-17 comes to Rs 15,000, your company’s accounts department will deduct Rs 10,000 from your salary, instead of Rs 13,000 which was applicable in 2015-16.
Those employees who do not have the HRA benefit can claim a higher deduction of Rs. 60,000 under section 80GG for payment of house rent. This limit has been revised from the existing Rs. 24,000 per annum to Rs. 60,000.
Another area of relief in taxation is for non-residents. NRI tax payers without PAN are currently subjected to a higher rate of TDS. However the FM proposed to make amendment in the relevant provision after which, such higher rate will not apply if the NRI tax payer furnishes relevant alternative documents.
Our view:
In the metros, Rs 60,000 would not make up for even half the rent paid in a year. This limit could have been still higher.
Housing
First – home buyers will get increased tax deduction on interest on home loan. They will be allowed a deduction for additional interest of Rs. 50,000 per annum for loans up to Rs. 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs. 50 lakh.
Our view:
This is positive; however given the fact that home prices in the metros have sky-rocketed in the past few years, home buyers from these cities do not stand to benefit much from this tax sop.
Investment
The period for getting benefit of long term capital gain tax in case of unlisted companies is to be reduced from 3 years to 2 years.
Presently DDT is not charged to investors; it is paid by the companies. However from now on, in addition to DDT paid by companies, tax at the rate of 10% of gross amount of dividend will have to shelled out by the recipients of such dividend, that is, individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum.
Our view:
Investors with higher incomes will now have to bear the brunt of higher tax by way of DDT.
Retirement benefits
Up to 40% of your withdrawals from National Pension Scheme (NPS) at the time of retirement will be totally exempted from tax. Until now, NPS withdrawals were not tax exempt, unlike in PPF and EPF.
The annuity fund which goes to the legal heir after the death of pensioner will not be taxable in NPS, superannuation funds and other recognized provident funds.
Employers can limit their contribution in recognized Provident and Superannuation Funds to Rs. 1.5 lakh per annum for taking the tax benefit.
Our view:
Exempting NPS withdrawal on retirement is a good move. This will hopefully attract more people towards NPS and help them benefit from the lower charges and allocation to equity.
Lifestyle
Wearing clothes of your favorite brands could get expensive as branded readymade garments with a retail price of Rs 1,000 and above will attract a higher excise duty.
Cars of all sizes will be costlier as a new infrastructure cess will be charged on them – 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs.
Cigarettes are set to cost more as the excise duties on various tobacco products other than beedi will increase by about 10 to 15%.
Our view:
Not something that will make the consumers smile.
To Conclude
We believe that the Budget is the FM’s attempt to chart a growth path for the economy, which had been stagnating in the past. The focus for this Budget has very clearly been the rural consumer, and the encouragement of entrepreneurship amongst certain sections of society. However, as the FM has laid out a fiscal path for the country, as investors, we need to plan our household budgets just as well and must remember to be focused on our long term financial goals.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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