All things remain the same

For the common Indians, budget 2018 was more of a give-and-take. Unless you are really poor, in which case the government’s proposed healthcare protection scheme is a boon, any gain given in the budget has also been taken away.

The average young man and woman will have to earn more, spend less, save more, and invest for the long term. Let us have a look at what and how your personal finances are impacted.

Standard deduction trick: While some relief to the salaried class taxpayer was anticipated by way of increased exemption limits, the budget gave a standard deduction of Rs 40,000 per annum but at the cost of taking away transport allowance (Rs 19,600 per year and medical allowance (Rs 15,000 per year). Effectively, this gives a token relief in terms of actual tax payable. Even, that relief can be difficult to realise, as cess will increase to 4 per cent from 3 per cent. Personal income tax slab rates, house rent allowance (HRA) and home loan principal and interest tax breaks all remain same, which was under expectations of some relief this time.

For new women employees, there is a zero-sum game. The budget has proposed a reduction in the contribution that such new women employees make to the employees provident fund organization (EPFO), from 12 per cent to 8 per cent. While this will effectively mean a higher take-home pay for them but on the flip side their compulsory savings will come down.

LTCG tax: The re-imposition of the long-term capital gains (LTCG) tax on listed stocks and equity mutual funds is perhaps the biggest change in personal savings taxation. From now on, selling stocks or equity mutual funds that you have held for the long-term (greater than one year) will mean paying 10 per cent tax (including cess) on gains worth more than Rs 1 lakh. Earlier, there was no tax if you held the instruments for over a year. Unfortunately, tax-saving (ELSS) fund investments are now not completely tax-free subject, if gains realised are over Rs 1 lakh. Interestingly, Ulips (unit-linked insurance plans), which are investment cum insurance plans, are likely to escape LTCG tax axe, as the maturity benefit from them is not taxed.

We will advise common people to not confuse insurance with investment, and not blindly follow an investment avenue just because of tax advantage. Let asset allocation, risk profile, and goals guide your investments.

 

DDT on equity funds: The finance ministry has proposed to introduce the dividend distribution tax (DDT) at 10 per cent for all equity-oriented funds (including balanced, equity saving and arbitrage funds). DDT will be paid by asset management companies (AMCs) and then dividend will be distributed to the investor. There was zero DDT before and now DDT will be paid on your behalf by fund houses at the rate of 10 per cent, leading to lower realisation.

We think investors whose dividend income is below Rs 1 lakh should move to growth option and use the systematic withdrawal plan (SWP) facility so they will not attract 10 per cent DDT rate.

While the tax proposals (DDT and LTCG tax) have eroded off some gains on the edges for mutual fund investors, equities as an asset class remain one of the best performing investment categories.

Cheer for seniors: If the budget has actually benefited one category of common man and woman, it is senior citizens. The limit on tax-free deposits bearing high interest of 8 per cent has been increased from Rs 7.5 lakh to Rs 15 lakh. This means you can add Rs 60,000 to your interest income annually. Healthcare premium benefit has also become better.

The rebate on the premium for senior citizens medical insurance has been raised from Rs 30,000 to Rs 50,000, resulting in a tax saving of about Rs 6,000 per annum. Both the tax-free deposits and health insurance premium goodies will depend on the senior citizen’s income and ability to take advantage of the rules. As a proportion of the whole senior population, these moves will likely positively benefit only a small share.

There was not much in the current budget for a salaried class and hence the impact on personal finance was bit affected by LTCG tax and increased cess. The personal financial goals becoming due in the coming years will have the incremental tax impact, if the investments are in equity and related investments. Otherwise all things remain same.

(The author is chief executive officer of Right Horizons)