The Finance Minister of India will announce the Union Budget 2013-14 towards the end of this month, February 28, 2013 to be precise. Unlike previous times, these days, budget holds fewer secrets. With growing awareness, even the most critical topics are discussed in detail even in pre-budget sessions. Nonetheless, the budget still influences not only big businesses but also households. So we thought of sharing our perspective of Budget 2013-14 and how it may impact the common man.
Expectation No 1:
The base tax exemption slab might be raised from Rs 2 lacs to Rs 2.2 lacs
Why such expectation?
In a bid to curtail growing fiscal deficit ; the government has taken some bold steps in the past. Moves such as cut in subsidy expenses on LPG and diesel along with hikes in railway fares to name a few, have taken quite a toll on household budgets. In order to provide some relief from rapidly growing household expenses and leave more money in hands of consumers; the base tax exemption limit might be raised to 2.2 lacs. This will be another step ahead towards the 3 lacs tax exemption limit mentioned in the DTC (Direct Tax Code).
Impact
The tax liability of taxpayers would reduce and discretionary spending might go up. Base exemption limit for senior citizens may also go up proportionately.
Expectation No 2:
Exemption limit under Conveyance / Transport Allowance which is currently at Rs 800 p.m., might be hiked. Similarly, exemption limit on reimbursement of medicals expenses by employer and exemption limit on education allowance paid by employers would also increase
Why such expectation?
Decontrolling of diesel prices on bulk sales has made transportation costlier. To be able to minimise the impact of price hikes on common man, some respite might be provided by raising the exemption limit of conveyance allowance. Moreover, the limit on reimbursement of medical expenses and education allowance has not kept pace with inflation and was last raised almost a decade back.
Impact
The taxable income of an individual would reduce by the same amount with which exemption goes up. This would result in some savings on income tax.
Expectation No 3:
Lock-in period for tax saving fixed deposits may be reduced from the current 5 years to 3 years
Why such expectation?
The banking industry has been experiencing the muted deposit growth. If the lock-in period for tax saving deposits goes down, it may attract savers looking for secured and reliable tax saving instruments, thus helping banks raise more resources and garner incremental business.
Impact
This may make tax saving fixed deposits more attractive to conservative investors seeking to invest in tax saving instruments with shorter lock-in period. This move would also give level playing field to these deposits against Equity Linked Savings Schemes (ELSS), as far as locking period is concerned. At present lock-in period for ELSS schemes offered by mutual funds is the lowest i.e. 3 years.
Expectation No 4:
Widening of scope for Rajiv Gandhi Equity Savings Scheme (RGESS)
Why such expectation?
RGESS which was introduced in the previous union budget in order to attract new investors towards equity markets provides onetime benefit and has been limited only to individuals with income of less than Rs 10 Lacs, having no investments in equities in the past. It may not have many takers as the lower income group are left with little surplus after they have met their expenses and other tax saving commitments. In order to increase its attractiveness, RGESS can be expected to be made available for investors in the other segments as well and hence may see some increase in scope.
Impact
Widening of scope for RGESS may help individuals who have exhausted all their tax saving limits, park their left over surplus, post other tax saving commitments. This may thus attract individuals in the higher income segment who may not have invested any money in equity markets in the past, switch some of their saving component into equities.
Expectation No 5:
Reintroduction of Tax Saving Infrastructure Bonds U/S 80CCF
Why such expectation?
Tax Saving Infrastructure Bonds have seen a success in past 2 financial years. Individuals are missing this instrument which in the past has helped them bring down their taxable income by another Rs 20,000 per annum. Such instruments can be termed productive when it comes to economic growth. And hence is expected to find its place back on list.
Impact
Infrastructure Bonds can help individuals bring down their taxable income by another Rs 20,000 per annum and help infrastructure financing. Tax Saving Infrastructure Bonds also helps inculcate long term saving habits among individuals for a period as long as 10 to 15 years.
Expectation No 6:
Tax incentive on gold linked financial instruments
Why such expectation?
Rough estimates suggest that Indian households possess about 18,000 tons of gold. According to the World Gold Council data, about 23% of all imported gold by India was treated as investments, but 75% of jewellery was held with an investment perspective. The government is looking for avenues to curb import of physical gold, which has been increasing the import bills and impacting the nation's Current Account Deficit (CAD). The Reserve Bank of India (RBI)'s working group has recommended setting up of gold banks and introduction of gold-backed financial instruments. But there also needs to be a way to get as many takers for such gold linked financial instruments, which can reduce import of physical gold.
Impact
The introduction of tax incentive on gold linked financial instruments can help speed up the process of launching such gold linked instruments. Providing tax incentive on gold linked financial instruments which can provide returns akin to the precious yellow metal, can help in impounding idle unproductive gold. This can further reduce taxable income of individuals who look for saving in gold.
Expectation No 7:
Affordable housing may receive Infrastructure status
Why such expectation?
Currently there is a supply shortage in affordable housing segment. There are numerous issues which impede the progress of projects falling under the category of affordable housing. If given "Infrastructure" status, it would become easy for developers to raise money from banks without much of hassles.
Impact
There is a huge organic demand for affordable housing accommodations and with "Infrastructure" status, affordable housing segment may become more attractive to developers as getting clearances and sanctions to finance projects will be easier and faster. This will help reduce the supply shortage in affordable housing and would provide low budget buyers a chance to buy their dream home. However, there have been several other issues too which simultaneously need to be addressed to get the maximum benefits.
Expectation No 8:
The income tax exemption on payment of interest on housing loans may be raised from current Rs 1.5 lac to Rs 3 lac.
Why such expectation?
The property prices have been rising and household budgets are being hit by the rising inflation. This has impacted the growth in housing loan disbursals of banks. There is a need to incentivise borrowers, who go for a home loan to buy their dream house.
Impact
This may lower the tax outgo of home loan borrowers and provide some relief in managing already stretched household budgets.
Expectation No 9:
The Union Budget 2013-14 might provide more guidance on new taxation avenues such as tax on superrich and inheritance tax
Why such expectation?
To contain fiscal deficit below 4.8% in the financial year 2013-14, government is expected to boost its tax revenues. India has a low tax to GDP ratio which provides government the room to modify current taxation systems and expand the scope and increase the impact of taxation. Government has been considering imposing taxes on superrich and re-introducing inherence tax which was abolished some 2-3 decades ago. However, there is no clarity on the subject as yet. No details as to how the government would charge superrich and collect inheritance tax are available so far.
Impact
While tax on superrich may boost government revenues, it may negatively impact the investment environment in the country. Process of capital formation, wealth creation and job creation may be negatively impacted.
Expectation No 10:
The number of centrally funded welfare schemes may go down. But welfare schemes in rural and semi urban areas would be rationalised and thus effectiveness may improve.
Why such expectation?
Reducing fiscal deficit is the top agenda of the government. The number of centrally sponsored schemes might come down. In the wake of limited resources and possible cuts in the welfare spending; centrally sponsored schemes would be expected to significantly improve their effectiveness which may eventually result in improvement of healthcare and education facilities.
Impact
Rural and semi urban areas may get better drinking water facilities and would be well equipped to tackle problems pertaining to garbage and sewerage management. Basic healthcare facilities and access to educational facilities may also improve as the accountability would rise with reduction in number of schemes.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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