As soon as the budget is presented, We see a deluge of analyses and memes coming our way. However, readers of this blog know that we choose to wait for clarifications and finer details so that readers get the right perspective for themselves.
A Large number of people were left confused because of the 2 Tax Regimes that the Budget talked about. Different People would have different opinions 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 ?
- If you are earning less than Rs. 5 Lakhs p.a. then life has not changed much for you. You can relax.
- If you are someone who “hates” to save money, the option of moving to new tax regime is for you. (Provided you earn more than Rs. 5 Lakhs p.a.)
- If you are earning more than 20 Lakhs p.a. then the new regime saves some tax outflow for you. So, it could be sensible for you to move to the new regime. (What could be insensible is, you stop saving money)
- The Deposit Insurance is increased from Rs. 1 Lakh to Rs. 5 Lakhs. For those who don’t know, this is Rs. 5 Lakhs “per depositor”. Some “smart” people try to make Rs. 5 Lakh FD in different banks so that entire amount is insured. Unfortunately, its not. And if you try to make it in different names, clubbing provisions will be applicable.
- 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 in the long term. Thus, investing systematically in diversified equity could be helpful in wealth creation.
What’s not so good?
- If you want to move to the new Tax regime, you have to forego most of the deductions (Like 80C, 80D, HRA, Standard Deduction etc).
- If you are earning between Rs. 5 Lakhs p.a. to Rs. 20 Lakhs p.a., life is not that simple for you. There are a various calculations that you might have to do, whether you want to go for old or new tax regime. It will also depend on your preference (or compulsion) to make several tax saving investments. Thus, its better that you spend some time with your advisor (although the FM thought otherwise), and find out what works better for you.
(The Table Shows Old regime and New Regime considering 80C, 80D and Standard Deduction. We have not considered HRA and other deductions in this table as they would differ from person to person. Thus, the decision to choose the regime will differ from person to person even if they have same income.
3. The new tax regime suggests that there is no need to save for tax saving. There are many people who are happy that now they do not “have” to save. They will save tax anyways. For them, I have few questions.
- If you ride a bike, why do you wear a helmet? Is it to save fine? Or is it to save your life?
- Why do you use a pedestrian bridge? Why do you not cross the railway track? Is it to save penalty? Or is it to save your life?
When you invest money for your future, don’t do it just for tax saving. Do it so that you create wealth for your own future.
When you buy a term plan, don’t do it only to save tax. Do it so that your dependents are not left stranded if something unfortunate happens to you.
Tax saving is just an additional incentive given to you for your own good. It does not mean you stop doing your own good, just because the additional incentive is gone.
4. The Dividend Distribution Tax (DDT) is “Abolished”. This is quite tricky. Because it will now be added to the investors income and will be taxable as per their slab.
This needs to be evaluated based on whether it’s a Debt Mutual Fund or Equity Mutual Fund, what is the income slab of the investor and so on.
Those in low tax slabs, will “mathematically” benefit from this. (Psychologically, they will be uncomfortable as now they will feel the tax going from their pocket)
But those in higher tax slabs, evaluation needs to be done on a case-to-case basis. (Again, consulting an advisor might be needed – Something contrary to what the FM had thought).
Also, the DDT is gone, but there will be a TDS on payment of dividend above Rs. 5,000. So, while the cashflows might not improve to a great extent, the onus of tax liability is definitely shifted from the corporates to the recipients (which could be individual investors).
What Should be our Plan of Action ?
We might argue that there could have been a several things which could have done much better in this budget. But 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).
- Saving or Investing money for your future is still important, even if the tax incentive seems to have gone away.
- The FM has already hinted that government intends to move into a “No-Exemption, No-Deduction” era. Do not commit yourself to something like an additional home loan, just to save tax. This is because, in future, the tax incentive might go and the loan will still be sitting on your head. In simple words, do not buy a property by taking a home loan, just to save tax.
2. Do not buy random insurance policies, just to save tax. Again, the tax incentive might go away, and you will be “forced” to continue paying the premium. Choose a non-compulsory product like ELSS for your 80C investments.
3. Your decision to buy a Term Plan or a health insurance, should have no dependence on tax saving. Buy them so that you are financially protected from unforeseen mishaps.
All-in-All, the budget comes with a mixed reaction. But that’s how life is. We can’t expect every day to come with a good news. We can only 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.
The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP, CIA, AFGP) is CEO with Nidhi Investments, Mumbai. His articles have a readership from 78 Countries across the Globe. He may be contacted on CEO@nidhiinvestments.com if you have any questions..
(The views mentioned in the article are personal opinion of the author)