Budget 2014-15 : What’s Good and What’s Not So Good ??

Budget-Clip-ArtWe saw a deluge of analyses coming on Budget 2014 right from 11th July 2014. However, we chose to wait for clarifications and finer details so that readers get the right perspective for themselves.

People would have different opinion about the budget depending on their own profession and field. However, from investor and taxpayers point of view, we have made an attempt to list down few good things and few not-so-good things about the budget.

What’s Good ?

  1. The Nil Tax Slab has been raised to Rs. 2.5 lakhs. Since the other slabs i.e. 10%, 20% and 30% slabs were untouched, this provides a saving of Rs. 5,000 to every individual /HUF earning more than or equal to Rs. 2.5 Lakhs. (There have been some misundertandings wherein people have interpreted that those in 30% tax slab will save Rs. 15,000 due to this change. But it is untrue. Your total tax saved due to this increase in nil tax slab, will be max Rs. 5,000).
  1. The maximum limit u/s 80C has been hiked to Rs. 1.5 Lakhs. While this enables additional tax saving, readers are advised to be wary about where are they putting their additional Rs. 50,000. There is a world of mis-sellers on prowl to pitch you their investment-cum-insurance plans to grab your additional Rs. 50,000. Before you invest this, just do some base calculations such as :

A. Add your PF deduction of the entire financial year.

B. If you have a home loan, add the principle repayment amount of your home loan. (You need to obtain a loan repayment schedule from the bank for exact figures).

C. If you have a term plan, add your term plan premium. If you don’t have a term plan yet, immediately buy one.

For example, if you have Rs. 4000 as your monthly PF deduction. Then you would have Rs. 48,000 towards PF. Then lets say your home loan principle repayment adds up to Rs. 60,000. And you have a term plan with an annual premium of Rs. 10,000. So now these 3 items add up to Rs. 1,18,000. Thus, you only need to invest Rs. 32,000 towards your 80C. Till last year, you might be investing more than Rs. 1 Lakh but getting tax benefit for only Rs. 1 Lakh. This year, plan in advance to get the full benefit.

  1. The maximum limit u/s 24B has been hiked to Rs. 2 Lakhs from 1.5 Lakh earlier. This could come as a great breather for those already having home loans and who are servicing EMIs. Those who have recently availed home loans, would have a higher component of interest in their EMIs in the initial years. Thus, this increase in exemption would help them to save some tax. Someone in 30% tax slab can get a tax saving of as high as Rs. 15,000 with this. Also, those couples having double income can save upto Rs. 30,000 given that :

A. Both are co-owners of property.

B. Both are co-applicants of home loan

C. Both are contributing towards EMI

However, for those who are looking to buy property as an investment are advised to view this with caution. Sec 24B is applicable on self occupied property. For rented out properties, entire interest can be set-off against the rent received. Thus, there is no change on that.

  1. Other than above, there have been certain measures taken which would contribute towards overall growth of the economy. This could result in equity markets giving good returns. Thus, investing systematically in diversified equity could be helpful in wealth creation.

What’s Not-So-Good ?

  1. Given the hefty inflation numbers, the Nil tax slab was expected to be increased till Rs. 3 Lakhs and 80C limit was expected to be hiked to Rs. 2 Lakhs. In fact, if it was hiked to Rs. 2 Lakh, government could have had access to huge low cost funds to plug the fiscal deficit. But it was marginally increased.
  1. The Long term holding period for non-equity mutual funds was increased from 12 months to 36 months. Also, the tax slab of 10% without indexation was removed and uniformly 20% with indexation was applied for non-equity mutual funds. This came as a big blow to the investors in debt mutual fund. Investors who had invested in FMPs which would mature after 10th July 2014, are feeling cheated.

What can we do about it ?                                                                                                        

As they say, there is no point in crying over spilled milk. Investors now need to tweak their strategies and see how they can benefit (or at least reduce loss).

  1. Even now, debt mutual funds haven’t really become a bad option. It’s just that, the tax arbitrage has gone for those holding between 12-36 months.
  1. Life is pretty much same for those investing in debt mutual funds for less than 12 months (be it any tax slab).
  1. Life is pretty much same for those in 10% slab as If they redeem debt mutual funds after 1 year, they will still pay 10% on the gains.
  1. Life is slightly different for those in 20% slab as they will have to invest with a time horizon of more than 36 months if they want to reduce tax liability.
  1. If you are in 30% tax slab, FDs and Debt Mutual Funds have become at par for a period of less than 36 months. But if you want to invest for more than 36 months, debt mutual funds still give you tax arbitrage. FD income will be taxable at 30% whereas debt mutual funds will be taxed at 20% with indexation.

All-in-All, the budget comes with a mixed reaction. But that’s how life is. You cant expect every day to come with a good news. You can just have a positive and receptive mind, which accepts every challenge as an opportunity, and take best possible advantage of the same.

We look forward to your valuable comments and feedback. Please feel free to contact us on CEO@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author)

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Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

3 thoughts on “Budget 2014-15 : What’s Good and What’s Not So Good ??

  1. “FD income will be taxable at 30% whereas debt mutual funds will be taxed at 20% with indexation”? If possible, Explain with a small example, prof Bajaj 🙂

  2. Sure bro. Lets consider this example:

    Mr. A and Mr. B, both are in 30% tax slab. Mr. A invests Rs. 5 Lakh in an FD giving him 9% interest. Mr. B invests Rs. 5 Lakhs in a debt mutual fund giving him 9% returns.

    After 3 years, Mr. A earns Rs. 1.35 Lakhs as interest on his FD. This will attract a tax liability of Rs. 40,500 @ 30% for Mr. A. Thus, post tax returns would be Rs. 94,500. i.e. 6.3% p.a.

    Whereas after 3 years, Mr. B earns Rs. 1.35 Lakhs gain on his investment. Using indexation, his investment of Rs. 5 Lakhs is treated as Rs. 6.05 lakhs (assuming 7% inflation). Thus, his taxable gain would be Rs. 30,000 which will be taxed @ 20%. Thus, the tax liability for Mr. B will be Rs. 6,000. Post tax returns would be Rs. 1.29 Lakhs i.e. 8.6%.

    Thereby, even if FD and debt mutual fund give equal returns, holding on to them for more than 36 months, saved Rs. 34,500 for Mr. B on an investment of Rs. 5 lakhs.

    Here, we have ignored the capital gains earned due to fall in interest rates, which could earn even higher returns in debt mutual fund. Also, for simplification of calculation, we have ignored compounding of returns for both FD and debt mutual funds.

    Hope this is helpful.

    Regards

  3. An outstanding share! I’ve just forwarded this onto a coworker who was conducting a little research on this.
    And he actually bought me lunch due to the fact
    that I stumbled upon it for him… lol. So let me reword this….
    Thank YOU for the meal!! But yeah, thanx for spending the time
    to discuss this subject here on your website.

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