As the dust settles on the Union Budget for 2013-14, the moral of the story is quite clear: if you don’t want to be disappointed, then don’t get your hopes too high. For a whole set of reasons, all of us — as savers, investors, businessmen and analysts — had psyched ourselves into expecting something special. As budget day came nearer, we heard the phrase ‘dream budget’ more and more. There was supposed to be some magic wand that P. Chidambaram would wave and all would be well again.
It was always wishful thinking and has proven to be. However, from the perspective of personal finance, saving and investments, the budget has turned out to be a deep disappointment. There were a large number of quite reasonable expectations of simple measures that could have been taken but none of them have been. Somehow, the powers that be seem quite unaware of the fact that the ordinary individual saver is in a deep crisis and we need a structural overhaul in savings to rescue the situation.
We are saving less, we are saving in the wrong things and we are getting less from our savings. The propensity to invest in equity and equity-backed mutual funds is decreasing, while at the same time, deposits, bonds and other fixed-income investments are earning less and less compared to the consumer inflation rate. The budget does nothing for any of this.
In the weeks leading up to the budget, there were definite indications from the finance ministry that either an enhancement to the Rs 1 lakh limit for section 80C tax exemptions or some kind of a new pension-targeted saving scheme was in the works. None of that has materialised.
Instead, all we have is the extension of the Rajiv Gandhi Equity Savings Scheme (RGESS) from one to three years. Since it was first announced in the last budget, it has been clear that while the RGESS has the germ of a good idea, it was needlessly complicated. And learning to deal with all the complexity was not much use because the scheme could be used only once in a lifetime and that too by those who had never invested in stocks before.
The other changes too haven’t materialised. The section 80C limit of Rs 1 lakh is now unchanged for more than a decade and its real value has declined sharply. Channeling long-term, retirement-oriented savings remains a pipe dream.
Instead of improvements, the budget creates a couple of new problems. One is the massive hike in dividend distribution tax. If you are an investor who gets dividends from your stock investments or your fixed-income mutual funds, the deduction at source will be 25 per cent, rather than the current 12.5 per cent. Those who depend on these sources for income will be hit hard. From being barely more than the base income tax rate, the dividend distribution rate has gone up close to the highest tax bracket.
One more potential issue is that the KYC norms for insurance have been made easier, but not for mutual funds. This is an odd move, given that most of what is sold as insurance is actually investment products. Hopefully, by the time the budget is passed, this will be fixed.
The Rajiv Gandhi Equity Savings Scheme (RGESS), which offers a tax break to first time investors to draw them into the stock markets, was introduced in last year's budget.
This year’s budget takes the scheme forward by widening its base to include those earning up to Rs 12 lakh. The new provision will also allow the investor exemption for not only direct investment in equity shares but also if the investment is made in the scheme of participating equity mutual fund schemes. This removes the need to open demat accounts.
Also, the tax deduction of 50 per cent of the amount invested, subject to a maximum of Rs 25,000, has been extended to three years instead of the current one-year.
The redeeming feature of the modification proposed is that it has now opened RGESS to a new set of investors — those in the 30 per cent tax bracket (earlier available for those in 10 per cent and 20 per cent tax brackets only). This could throw open the prospects of widening the scope of the scheme in future years.
The scheme, under section 80CCG of the IT Act, offers tax exemption over and above that available for savings up to Rs 1 lakh under section 80C.
Around 10 mutual funds have already launched their respective RGESS compliant schemes in February 2013. Subscription in most of the schemes is scheduled to close around March 10, 2013, leaving very little time for the retail investor to invest.
Mutual Fund RGESS schemes are mostly three-year closed ended schemes. Subscription mobilised in RGESS equity schemes will be invested in a mandated universe of CNX 100, BSE 100 and Navratna, Maharatna, and Miniratna PSU stocks, representing the best investment in the country.
Should one invest?
In RGESS, the tax benefit is provided upfront and so it reduces the investment outlay and makes post tax returns attractive, like any other tax savings scheme. RGESS in its tax savings concept is, therefore, similar to other exclusive tax savings schemes.
However, as RGESS is an equity mutual fund scheme, the dividends and the capital gains on maturity are tax free. The scheme gives the investors a tax deductible investment opportunity with a tax exempt return at the time of accumulation and maturity - i.e a tax exempt status at the time of investment, accrual and maturity. This makes the scheme attractive.
In a budget that offers a range of minor sops to investors, the finance minister has widened the scope for household savings. His proposals on issuance of tax-free bonds and inflation-indexed certificates will create newer opportunities for optimum utilisation of resources.
The budget will generate room for higher retail investment in bonds, which have found considerable following in recent years. The trend is borne out by sheer numbers - Rs 30,000 crore mobilised in 2011-12 and a further Rs 25,000 crore expected to be netted by the close of the current fiscal.
The government will now permit institutional borrowers to issue similar tax-free bonds up to Rs 50,000 crore in the course of the next financial year.
A number of entities, which play critical roles in the infrastructure sector, have lately raised money from ordinary investors. Bonds issued by the likes of IRFC and HUDCO have attracted large investments, thanks to a clutch of attractive features: their tax-free nature, reasonable rates of interest and comfort in terms of credit ratings.
At a time when interest rates are somewhat softening, it has to be seen how the trend shapes up over the next one year or two. Having said that, I have no doubt that fresh issuances — remember, the limit has been upped to Rs 50,000 crore — will boost the government's efforts to direct more household savings towards productive areas.
A point to be noted here is that institutions will be allowed to mobilise resources strictly on the basis of their “need and capacity”, as the budget has maintained.
Savers will have another reason to feel happy — the government will initiate steps to safeguard savings from inflation, courtesy specific instruments that could be “inflation indexed national security certificates”. This will be done in consultation with the banking regulator.
While it is too early to predict the basic characteristics of these certificates, it is quite clear that any attempt to offer inflation-indexed products will find takers, especially among the middle-class. The latter have virtually nothing to beat the corrosive effects of inflation on their portfolios. In fact, this could trigger an entirely novel sub-category of assets, which I am sure will be welcomed by the authorities. The latter, after all, has underscored its intention to have new and innovative instruments to mobilise funds in the latest budget.
Added to this are virtuous pronouncements on engendering low-cost, long-term finances — all of which should bring good news to investors in the course of time. Significantly, the government seems determined to dissuade savers from buying only gold; instead, it intends to encourage them to acquire financial instruments of various kinds.
The country's policy makers now need to do a comprehensive follow-up. Savers and borrowers must be bridged effectively. Various investment products, especially the new-generation ones, must be made easily accessible.
The basket of reasonably-priced choices before investors must be widened. This will bring a fresh set of investors to the market, help increase household savings and ultimately lead to more capital formation. Greater emphasis on efficient financial intermediation will, therefore, be an absolute necessity in the days ahead. The budget takes a firm step towards fulfilling these lofty goals.
Individuals look forward to the budget with expectations of tax reliefs from the finance minister. However, the minister always has the difficult task of tightrope walking between managing fiscal and current challenges, reviving the economy and meeting everyone’s expectations.
For the common man, there is limited reason to cheer for in today's budget as there has been no change in the basic income tax rates. A tax rebate of Rs 2,000 has been introduced for individuals whose income is between Rs 2 lakh to Rs 5 lakh per annum. People earning Rs 5 lakh per annum can save up to Rs 2,060 per annum in taxes. In other words, any individual earning up to Rs 2,20,000 p.a. will not be required to pay any taxes. For individuals earning above Rs 5 lakh there is no savings. The minister expects this proposal to provide tax benefits of Rs 3,600 crore to 1.8 crore tax payers.
The minister has pinched the higher income group by proposing a 10 per cent surcharge on tax for individuals having income exceeding Rs 1 crore. However, a breather for this is that the surcharge will be levied only for 2013-14. Statistics indicate that only 42,800 persons in this country have admitted a taxable income above Rs 1 crore.
To boost affordable housing, an additional deduction of up to Rs 100,000 has been proposed for first time home buyers availing themselves of a home loan of up to Rs 25 lakh. The loan has to be sanctioned during 2013-14. The value of the residential property has to be below Rs 40 lakh and the individual should not own any other residential house on the date of sanction of loan.
This is an encouraging step to some extent and will boost the real estate and allied sectors. The said deduction is in addition to the deduction an individual can avail themselves of Rs 1.5 lakh on self-occupied property. Depending upon the taxable income of an individual, this will result in tax savings ranging from Rs 10,300 to Rs 30,900 per annum. Also, if the individual has not exhausted the threshold of Rs 100,000 in 2013-14, the unavailed deduction could be carried forward and availed against the income of 2014-15.
More health schemes will be notified to widen the scope of deduction towards health insurance premium. However the meagre limits of Rs 15,000 per annum, which was expected to be revised upwards have been kept unchanged.
The loophole in case of tax exemptions for keyman insurance policies has also been plugged. Most of these policies were assigned to the keyman before maturity and the tax exemptions were being claimed on maturity. This has now been withdrawn.
The buyer of an immovable property (not agricultural land) will now have to deduct tax at source @ 1% on the sale price provided the value of property is Rs 50, 00,000 or more. This is irrespective of whether the resident seller has taxable capital gains arising on account of the sale. This may lead to a situation for the seller to claim a refund of this TDS in their individual return of income.
Any transfer of an immovable property for inadequate consideration (as compared to the stamp duty value), where such inadequacy is more than Rs 50, 000 will now attract tax in the hands of the buyer as well. In the era of technological advancement, it has been proposed to completely move towards the e-filing for wealth tax returns as well.
To sum up, the finance minister had a tough job of striking a balance between growth and populism. He has overall delivered a relatively neutral budget on taxes in keeping with his theme of prudence, restraint and patience.