How will Budget 2017 affect your finances?
A quick look at Budget’s implications and its pros and cons
This year’s Budget showered benefits on a vast majority of Indians. For most tax payers, a portion of the FM’s speech must have been music to the ears, when he said, “I propose to reduce the existing rate of taxation for individual assessees between incomes of Rs 2.5 lakh and Rs 5 lakh to 5 per cent from the present rate of 10 per cent. This would reduce the tax liability of all persons below Rs 5 lakh income either to zero (with rebate) or 50 per cent of their existing liability.” But, the benefits under the personal taxation ended right after this statement.
On the flipside, the rebate on tax payable of Rs 5,000 now stands reduced to Rs 2,500 in view of the cut in tax rate for this category. The move to reduce the tax rate at the lowest level to 5 per cent has been done to widen the taxpayer base. But, the big shift is towards simplifying the tax filing process for those in the lowest tax bracket with a single page form, which will remind many of the Saral form of the bygone days. The Budget has also introduced a provision where the first-time income tax return filer may not face any scrutiny.
Of things to come
Cleaning up of the tax anomalies is an aspect that this government is serious about. Be it the ending of tax loopholes on which the fixed maturity plans (FMP) floated by mutual funds thrived before July 2014. Bringing in equal lock-in among similar financial instruments ensured that no single financial instrument unduly benefits from tax lacunae.
This approach was the basis on which several investors in equities and equity mutual funds worried over the past few weeks when talks of bringing in changes to the lock-in period of investments in equities was being discussed. A one year holding period in equities is considered as long term and gains when exiting investments in them after a year is treated as long term capital gains, which is nil. To some extent, the logic of reducing the holding period of investments in land and real estate from three to two years tries to bridge the holding period gap.
For first-time taxpayers, the assumption that they will be at the lowest tax bracket to begin with is being unfair to young Indians, many of whom enter the job market with salaries that puts them at the highest tax bracket. Anyway, for first-time taxpayers the finance minister mentioned that there will be no scrutiny in the first year of filing taxes irrespective of the tax bracket they fall in. There is respite for taxpayers at the 5 per cent tax bracket, who will be subject to easy tax filing with a single page tax filing form.
Likewise, to curb false house rent allowance (HRA), claims in case of payment of house rent exceeding Rs 50,000 a month has to be accompanied by a 5 per cent tax deduction at source (TDS). Deducting TDS on HRA would mean there would be a trail which can be easily examined by the tax department. This measure seems to have been introduced because the earlier requirement of furnishing the PAN number of the landlord while claiming HRA benefits was being misused. This way, the loopholes are further being closed.
Tax planning 2017
This Budget will change the way you plan your personal finances. The reason for such a change stems from the fact that money in cash in our lives will no more be the same. Mention to near cash money instruments will get louder. Going by the returns one earns from banks in the savings account or even under the fixed deposits, one will be advised to earnestly get into the habit of setting aside money in liquid funds. These are a type of mutual fund, in which you can park the surplus for tax efficient gains compared to bank savings.
Today, several AMCs have taken advantage of the digital medium, which makes transfering money from your bank account to these type of funds a matter of tapping a few fingers. Yes, they do not guarantee returns but experience them and you will find that what they offer is more than what the bank pays. And, at the same time it is also tax efficient. Unlike the interest that you earn from the bank savings account, which gets added to your income and is taxed depending on the tax slab you fall under, the gains from monies in liquid funds do not attract any tax liability.
The near-end of guaranteed return instruments, lower interest rates and higher inflation are all ominous signs of erosion of money’s worth if it is not deployed in instruments which beat inflation. One will have to get used to living with the global trend of high returns coming only with high risk. The only asset class which beats inflation is equities and the long-term average return from the Sensex is about 16 per cent that is tax free, should be seen as an opportunity to not only grow your wealth but also as an option to partake in the economic growth of the country.
However tempting it may seem, do not blindly look at parking your money in financial instruments just to save income tax. Use tax savings as a benefit that will also meet your overall financial needs. Although every taxpayer will have additional Rs 12,500 this year because of reduction in tax liability, one may wonder what can little over Rs 1,000 a month change in your life. Prudent investors know the benefit of investing every rupee; you could take a leaf out of their financial wisdom.