Expectations are running high ahead of the Union budget to be tabled in Parliament today. Will finance minister Pranab Mukherjee announce sops on personal income tax, extend concessions to more savings and investment instruments, or introduce new taxes? All these queries will be answered by the afternoon.

Small delight

If the Economic Survey 2008-09 is any indicator, depositors in small savings schemes may be in for a surprise.

The survey has proposed that small savings rates should be linked to yields on government bonds or bank deposit rates of similar maturity. This will make the small savings rates more responsive to the conditions in the deposit-credit market.

Earlier, 25 states had jointly proposed before the Thirteenth Finance Commission that the Centre should bear all administrative expenses for the small savings schemes and reduce the real lending rates of the National Small Savings Fund (NSSF).

At present, a state pays 8 per cent interest to depositors of a small savings scheme, while it has to pay a 10 per cent interest to borrow money from NSSF. Thus, the cost of borrowing from NSSF is quite high compared to the market.

This might prompt the finance ministry to reduce the interest rate on small savings schemes. However, this is a politically sensitive issue. Even the Employees’ Provident Fund Organisation has retained the interest rate payable to its subscribers at last year’s level of 8.5 per cent. The government had last reduced the interest rates on small savings schemes in 2003 by one percentage point to 8 per cent.

Finance minister Pranab Mukherjee may decide to lower small savings rates by another 50 to 75 basis points. The yield on government securities vary between 6.50 per cent and 7 per cent, while bank fixed deposits for more than 5 years fetch 7.25-7.75 per cent interest.

Compensation

A rate cut on small savings schemes may be compensated by extending tax concessions. At present, only National Savings Certificate and Public Provident Fund enjoy tax benefits under Section 80C.

Deposits and interest income on the Post Office Monthly Income Scheme and Kisan Vikas Patra are not eligible for any exemption.

The only advantage for small savings schemes is that the tax on interest income is not deducted at source, unlike bank deposits.

The finance minister’s top priority in this budget would be to bring down the fiscal deficit without compromising the momentum in economic growth. Hence, reducing the interest rate while extending tax concessions under Section 80C to small savings schemes would be a good option.

In this way, depositors’ interest in small savings schemes will also be retained.

Standard deduction

There are talks of the finance minister re-introducing standard deduction for salaried employees. Standard deduction for the salaried was withdrawn in 2006-07. For the non-salaried, however, a standard deduction of Rs 30,000 is available for paying taxes on income from house property, while businessmen can adjust their losses against profits.

The Institute of Chartered Accountants of India had suggested in its pre-budget memorandum the re-introduction of standard deduction for the salaried. After all, Pranab Mukherjee’s prerogative would be to increase disposable income in the hands of the middle class, the largest consumer of manufactured goods, to boost consumption in economy.

If standard deduction is reintroduced, it won’t be much — maybe between Rs 20,000 and Rs 25,000 — and available up to a certain income level, say Rs 5 lakh per annum. Last year, finance minister P. Chidambaram had increased the basic exemption limit and realigned the income tax rates, far exceeding the general expectations.

More relief on course

The economic survey also proposed to do away with all surcharges and cess levies. If this happens, people with an annual income of less than Rs 10 lakh won’t have to pay the 3 per cent education cess that they are paying now. People earning more than Rs 10 lakh a year are now required to pay a surcharge of 10 per cent.

If the government withdraws the securities transaction tax (STT), as suggested in the survey, it may be keen to recover the tax foregone by slapping long-term capital gains tax.

In that case, investment in shares and equity mutual funds will lose its charm a bit. The government increased short-term capital gains tax on equity investment to 15 per cent last year from 10 per cent.

A 5 per cent long-term capital gains tax on equity investments along with the withdrawal of dividend distribution tax (DDT) and STT won’t be unacceptable to the investor community.

A tax break on infrastructure bonds and deposits may open up new investment avenues for small and retail investors. Interestingly, a number of mutual funds have already filed applications with market regulator Sebi for launching infrastructure funds. Among them, Reliance Mutual Fund has already launched its scheme and mobilised over Rs 2,350 crore.

So, stay tuned to the Union Budget 2009-10 and check out if there’s anything in it for you.