BUDGET AND YOUR MONEY

So, the budget season has come to an end. And like every other year, there was much analysis on how this budget affects the common man. As the noise settles, we present before you, in a simple manner, an analysis of the changes that are going to affect your personal balance sheet.

Introducing a category – Very Senior Citizens

First and foremost, the most basic change, which affects the taxpayers uniformly, is the revision of the basic exemption limit from Rs.1.6 lakh to Rs.1.8 lakh will result in a tax saving to the tune of Rs. 2,000.

The exemption limit for women remains at Rs. 1,90,000 whereas that for senior citizens has been marginally increased from Rs. 2.40 lakh to Rs. 2.50 lakh. In addition, the qualifying age for senior citizen benefit has been reduced to 60 years from 65 years.

A new category – ‘Very Senior Citizens’ has been introduced. Those who turn 80 years of age during a financial year would be classified as Very Senior Citizens and the basic exemption limit for them has been set at Rs. 5 lakh. That is, for those falling under this category, there will be no tax liability if their income does not exceed Rs. 5 lakh.

 

Other changes for an individual taxpayer include

  • The annual tax exemption of Rs. 20,000 (over and above Rs. 1 lakh exemption under Sec 80C) available to taxpayers for investment in infrastructure bonds will continue during the year 2011-12.
  • Under the New Pension Scheme, only employee contribution will be considered within the qualifying limit of Rs. 1 lakh under Section 80C.
  • Another measure aimed at reducing the compliance burden is the exclusion of salaried tax payers, who do not have other sources of income, from filing returns. The entire tax liability of a salaried taxpayer is discharged through the mechanism of TDS. Therefore, filing of return leads to duplication of existing information.

However, investors should keep in mind that such cases are rare. Every taxpayer, small or big, would have at least bank interest as a source of income and he will have to file a return for the same.

Dividend Distribution Tax (DDT) increased for institutional investors

The current DDT rates for debt schemes stands at 12.5 per cent for individuals and Hindu Undivided Family (HUFs) and 20 per cent for others. The DDT from money market or liquid funds stands at 25 per cent for all category of investors.

It has been proposed to increase the DDT to 30 per cent on dividends issued by debt and liquid schemes to corporate investors. Earlier corporates used to enjoy a tax advantage by investing in a debt scheme over a bank fixed deposit. This move is aimed at reducing the said tax arbitrage. While mutual funds will still score over bank deposits on the liquidity front, it is likely that the inflows from corporates to these fund categories may be impacted thus adversely impacting the asset under management of few debt schemes.

However, the same has not been proposed for individuals and they will continue to have a tax advantage by investing in debt/liquid mutual fund schemes over bank deposits.

Foreign investors can invest in mutual funds

It is proposed to allow foreign investors who meet the Know Your Customer (KYC) requirements to directly invest in schemes offered by Securities Exchange Board of India (SEBI) registered equity mutual funds. It has to be noted that this rule is applicable only for equity-oriented schemes.

This move is directed towards widening the target investment class for mutual funds and is a big positive for mutual funds and in general, the capital markets.

The gold impact

It is proposed to impose a 1 per cent central excise duty on jewellery and articles of gold, silver and precious metals sold under a brand name. It is expected that this move will make the said category of assets more expensive.

Services, which will get dearer

While the standard rate of service tax has been retained at 10 per cent, new services have been brought under the service tax net:

  • Hotel accommodation charging a tariff in excess of Rs. 1,000 per day and service provided by air-conditioned restaurants that have license to serve liquor
  • Tax on all services provided by hospitals with 25 or more beds with facility of central air-conditioning.
  • Service tax on air travel both domestic and international has been raised
  • Services provided by life insurance companies in the area of investment and some more legal services proposed to be brought into tax net. (This move may increase the charges for some guaranteed Unit Linked Insurance Plans – ULIPs).

To conclude, the Union Budget 2011-12 was primarily a non-event for an average investor. The tax relief provided will be more than offset by the new services included in the service tax net. The changes made were primarily to bring the present tax structure in line with the Direct Taxes Code, expected to be effective from April 2012.

So, the budget season has come to an end. And like every other year, there was much analysis on how this budget affects the common man. As the noise settles, we present before you, in a simple manner, an analysis of the changes that are going to affect your personal balance sheet.

Introducing a category – Very Senior Citizens

First and foremost, the most basic change, which affects the taxpayers uniformly, is the revision of the basic exemption limit from Rs.1.6 lakh to Rs.1.8 lakh will result in a tax saving to the tune of Rs. 2,000.

The exemption limit for women remains at Rs. 1,90,000 whereas that for senior citizens has been marginally increased from Rs. 2.40 lakh to Rs. 2.50 lakh. In addition, the qualifying age for senior citizen benefit has been reduced to 60 years from 65 years.

A new category – ‘Very Senior Citizens’ has been introduced. Those who turn 80 years of age during a financial year would be classified as Very Senior Citizens and the basic exemption limit for them has been set at Rs. 5 lakh. That is, for those falling under this category, there will be no tax liability if their income does not exceed Rs. 5 lakh.

Other changes for an individual taxpayer include

4 The annual tax exemption of Rs. 20,000 (over and above Rs. 1 lakh exemption under Sec 80C) available to taxpayers for investment in infrastructure bonds will continue during the year 2011-12.

4 Under the New Pension Scheme, only employee contribution will be considered within the qualifying limit of Rs. 1 lakh under Section 80C.

4 Another measure aimed at reducing the compliance burden is the exclusion of salaried tax payers, who do not have other sources of income, from filing returns. The entire tax liability of a salaried taxpayer is discharged through the mechanism of TDS. Therefore, filing of return leads to duplication of existing information.

However, investors should keep in mind that such cases are rare. Every taxpayer, small or big, would have at least bank interest as a source of income and he will have to file a return for the same.

Dividend Distribution Tax (DDT) increased for institutional investors

The current DDT rates for debt schemes stands at 12.5 per cent for individuals and Hindu Undivided Family (HUFs) and 20 per cent for others. The DDT from money market or liquid funds stands at 25 per cent for all category of investors.

It has been proposed to increase the DDT to 30 per cent on dividends issued by debt and liquid schemes to corporate investors. Earlier corporates used to enjoy a tax advantage by investing in a debt scheme over a bank fixed deposit. This move is aimed at reducing the said tax arbitrage. While mutual funds will still score over bank deposits on the liquidity front, it is likely that the inflows from corporates to these fund categories may be impacted thus adversely impacting the asset under management of few debt schemes.

However, the same has not been proposed for individuals and they will continue to have a tax advantage by investing in debt/liquid mutual fund schemes over bank deposits.

Foreign investors can invest in mutual funds

It is proposed to allow foreign investors who meet the Know Your Customer (KYC) requirements to directly invest in schemes offered by Securities Exchange Board of India (SEBI) registered equity mutual funds. It has to be noted that this rule is applicable only for equity-oriented schemes.

This move is directed towards widening the target investment class for mutual funds and is a big positive for mutual funds and in general, the capital markets.

The gold impact

It is proposed to impose a 1 per cent central excise duty on jewellery and articles of gold, silver and precious metals sold under a brand name. It is expected that this move will make the said category of assets more expensive.

Services, which will get dearer

While the standard rate of service tax has been retained at 10 per cent, new services have been brought under the service tax net:

* Hotel accommodation charging a tariff in excess of Rs. 1,000 per day and service provided by air-conditioned restaurants that have license to serve liquor

* Tax on all services provided by hospitals with 25 or more beds with facility of central air-conditioning.

* Service tax on air travel both domestic and international has been raised

* Services provided by life insurance companies in the area of investment and some more legal services proposed to be brought into tax net. (This move may increase the charges for some guaranteed Unit Linked Insurance Plans – ULIPs).

To conclude, the Union Budget 2011-12 was primarily a non-event for an average investor. The tax relief provided will be more than offset by the new services included in the service tax net. The changes made were primarily to bring the present tax structure in line with the Direct Taxes Code, expected to be effective from April 2012.