BUDGET 2012 Simplified for the retail Investor

         

        So the d-day has arrived. The suspense relating to BUDGET 2012 is now out in the open and the Pandora’s box is has now opened.

      Now, if you google "BUDGET 2012" now, you will get 100s of hits, if not more.

So why should you visit my BLOG today to read about the Budget? 

      Because here, I have attempted to remove all unnecessary info, data etc and the article below is written in a simple, easy to understand manner keeping the retail Investor’s point of you in mind.

No jazzy talk, no extra details, just talking plainly about the couple of things that matter most to a retail Investor like you and me.

So, what matters to a retail Investor in India?

What does a retail Investor look for in the BUDGET document?

     According to me, the following things matter to a retail Investor?

1.     What are the New Income Tax Rates applicable to me the next financial year (FY 2012-13)? Basically, tax kitna lagega are kitna tax bachha?

2.     What is the impact on my Investments? Should I change my tax investments especially under section 80C where I can invest up to Rs. 1 lac and save tax?

3.     What has changed under section 80D that deals with Medical Insurance? A section where up till last year I could pay medical Insurance premium and get deduction up to Rs.15,000 (Rs. 20,000 in case I am paying premium for parents who are Senior Citizens)

4.     Any other extra deduction that I can avail off and therefore save some Income Tax?

5.     What about changes in Indirect Tax laws or rates?

6.     Any major legislative (tax laws) changes that I need to worry about? For example people were talking about Income Tax Act 1961 being abolished and replaced with DTC (Direct Tax Code).

7.      

So let me attempt to answer all the above questions one by one?

1.   What are the New Income Tax Rates applicable to me the next financial year (FY 2012-13)? Basically, tax kitna lagega are kitna tax bachha?

Ok. Here is the Old Income Tax slabs (FY 2011-12)

Income Tax Slabs for FY 2011-12 (current Financial Year)
Income tax slabs 2011-2012 for General tax payers
Tax slab (in Rs.)	Tax
0 to 1,80,000*	No tax
1,80,001 to 5,00,000	10%
5,00,001 to 8,00,000	20%
Above 8,00,000	30%
*For Individuals other than Woman assesses and who are not Senior Citizens
Basic exemption limit for other assesses	Rs.
Women assesses less than 60 years of age	1,90,000
Senior citizen (60 years to 80 years)	2,50,000
Very Senior citizens ( Age > 80 years)	5,00,000

And here are The Revised Income Tax Slabs as per Budget 2012 applicable to Individuals for next financial year (FY2012-13):

New Income Tax Slabs for FY 2012-13
(Next Financial Year 2012-13)
Income (Rs.)	Tax rate (%)	Savings (Rs.)
Up to Rs. 2,00,000* of Income	NIL	Rs. 2,060
Rs. 2,00,001 to Rs. 5,00,000	10%	Rs. 2,060
Rs. 5,00,001 to Rs. 10,00,000	20%	Rs. 2,060
Above Rs. 10,00,000	30%	Rs. 22,660
*For Individuals other than Woman assesses and who are not Senior Citizens
Basic exemption limit for other assesses	Income (Rs.)
Women assesses less than 60 years of age	2,00,000
Senior citizen (60 years to 80 years)	2,50,000
Very Senior citizens ( Age > 80 years)	5,00,000
Source: DNA India

Comment:

As you can notice from above, Budget 2012 has given an income tax savings of mere Rs. 2,060 is available to an Individual male assesses earning income up to Rs. 8 lacs. However, if your income is above Rs. 8 lacs, than your tax savings next year is Rs. 22,660 approximately.

2.   What is the impact on my Investments? Should I change my tax investments especially under section 80C where I can invest up to Rs. 1 lac and save tax?

The most important Section under the Income Tax Act to claim tax deduction is Sec 80C wherein you and I can invest in various instruments and claim tax deduction up to Rs. 1 lac. Well, fortunately or unfortunately, not much has changed under Sec 80C. Neither the investments avenues have been reduced nor added, barring a small clause on Insurance plans on which clarifications are awaited. Thankfully, and that GOD for this, the most profitable investment avenue u/s 80C, Tax Saving Mutual Funds or ELSS are still going to be there next here. This is the best thing that has happened according to me…(to know more about Tax Saving Mutual Funds or ELSS, read my past article titled INVEST and therefore SAVE tax and not vice versa http://niravpanchmatia.blogspot.in/2012/03/invest-and-therefore-save-tax-and-not.html)

3.   What has changed under section 80D that deals with Medical Insurance? A section where up till last year I could pay medical Insurance premium and get deduction up to Rs.15,000 (Rs. 20,000 in case I am paying premium for parents who are Senior Citizens)

After you have used section 80C to avail deduction of Rs. 1 lac, the other option is to use Sec 80D and avail deduction of another Rs. 15,000 to Rs. 20,000 by paying premium towards Medical Insurance for Self, spouse and 2 children (Rs. 15,000) or parents who are senior citizens (Rs. 20,000). Now senior citizen up till last year meant citizens above 65 years of age. That definition of senior citizen has been revised to include citizen above 60 years of age. A good amendment according to me…

While the above limits of Rs. 15,000 and 20,000 still hold true, the FM has given an additional deduction of Rs. 5,000 if you have incurred it “on any payment made on account of preventive health check-up for yourself or any member of your family”. Also, a deduction is available even if this check-up cost is paid for in CASH. A small but necessary change... (I believe this will help you and me to avail tax deduction on those innumerable medical check-ups that our doctors make us to do throughout the year).

4.   Any other extra deduction that I can avail off and therefore save some Income Tax?

YES. 3 more avenues to save on Income Tax…

1.     Till this financial year, even the nominal interest that you and I earned on our savings bank accounts (@ 4 %) was subject to tax. Going forward, Interest earned on deposits in Savings Account with Banks, Co-operative Societies and Post Offices shall not be taxed up till a maximum limit of Rs. 10,000 per annum. This deduction is available under a new section Sec 80TTA.

However, the above deduction until Rs. 10,000 is applicable to Individuals & HUFs only and not to Firms, associations and companies and the deduction is available for Interest earned on Savings accounts only and not applicable for Interest earned on Fixed Deposits. (that’s why Debt Mutual Funds give better income post-tax then Bank FD’s; read my article “The Rich Man’s Bank Accounts” http://niravpanchmatia.blogspot.in/2011/03/rich-mans-bank-accounts.html )

2.     One more, more options for tax-free bonds would be available next financial year. Further clarification awaited.

3.   

  One more to go. Yes, one extra Investment avenue has been added but not much clarity on it available yet. Even the Govt of India and the Finance Minister wants you to Invest in the Stock Markets. This in order to boost investment in the equity markets, FM has introduced Rajiv Gandhi Equity Savings scheme. The scheme allows for Income Tax (I-T) deduction of 50 percent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of three years. The details of the scheme will be announced in due course.

4.     No Income tax return to be filed for Salary Income below Rs. 500,000; not a deduction but a relief to newly salaried guy...

5.   What about changes in Indirect Tax laws or rates?

Yes, after good news comes some bad news. While the FM has given us some avenues to save Income Tax, he has given us a double whammy by increasing tax rates on Excise as well as Service tax rates that do not impact us directly but go on to increase prices of goods and services that we consume and therefore pinched our pocket.

a.   Standard Rates of Excise duty (a tax on manufacture of goods that is passed on to you and me and applicable to most manufactured items) raised to 12% from 10% earlier.

b.   Service tax rates also increased from 10% to 12%.

c.     More important, and this is the double whammy; while currently Service tax is applicable on selected items and most items were excluded from Service tax; going forward Service Tax would be applicable on most items barring 17 major categories of items that would be specified under the negative list…

d.     Import duty increased @4% on GOLD…so Gold prices likely to go up…

e.     Excise duty increased on big cars; therefore they will become costlier

What? Have you still not had enough? You want more bad news then Google Budget Highlights and you can read the Summaries provided by other people.

6.   Any major legislative (tax laws) changes that I need to worry about? For example people were talking about Income Tax Act 1961 being abolished and replaced with DTC (Direct Tax Code).

That is the biggest disappointment from BUDGET 2012. All the hype that FM will finally deliver and bring in the necessary reform by introducing the Direct Tax Code (DTC) by replacing the Income Tax Act 1961 and the Goods & Services Tax (GST) by consolidating various Indirect taxes was a mere hype. The FM , sadly, failed to deliver miserably on this front. Major Reforms? There are no reforms in this budget…

To conclude, our beloved Finance Minister today opened his Budget Speech with this remark,

“I must be cruel to be kind”

Well, what do I say! Our FM is a MAN of his word…He is a thorough gentleman..

Whatever benefits he has given to the common man under Income Tax, he has taken away under Indirect taxes by increasing Service Tax and excise duty rates and so on. But to be fair to our honourable FM, he is currently walking a tight rope after what happened in the Railway Budget. I just hope that all the major reforms that he has postponed like bringing in the DTC and GST, he brings sometimes during the next financial year. If not, join me in praying for this govt.

One Question: What do you do if the FM does not deliver a Budget to your expectations?

ANS.: You tighten your own family budget!!!

HAPPY BUDGETING…

4 Strong Reasons to invest in Tax Saving Mutual Funds

I am writing this article on March 12^th, 2011. 18 days remaining for the end of financial year i.e.; March 31^st.  Most of us have already made our tax related investments. However, if there is any scope still left u/s 80C; i.e. if you are yet to fully utilise Rs. 1 lakh max limit available u/s 80C (that enables you to claim deduction from your income), then you still have some time left (18 days to be precise) & every rupee of balance left should be deployed in well chosen Tax Savings Mutual Funds.

To know more about the various options available u/s 80c, read my previous article on this subject (http://niravpanchmatia.blogspot.com/2010/09/tax-saving-mutual-funds-or-elss.html ).

Now, Tax Saving Mutual Funds are a special category of mutual funds (also known as ELSS) that are eligible for deduction u/s 80c. Just like any other savings /investment avenue u/s 80c, there is a lock-in involved here. The lock-in period for tax saving mutual funds is the minimum at 3 years for any product u/s 80C. In case of PPF, it is 7 years(for partial withdrawal), 6 years for NSC, 5 years for Bank FDs & 5 years for ULIPs(too costly) & so on. Also, the returns over a 3 to 5 years period are one of the highest in case of Tax saving mutual funds.

Also, once the Direct Tax Code (DTC) comes into existence from 01/April/2012, as promised by the FM in his recent budget speech, tax saving mutual funds will cease to exist. (i.e., fresh investment in tax saving mutual funds will not be allowed; those who have already invested in them till Mar 31, 2012 will be eligible for deductions). So this financial year (FY 2010-11) and the next Financial Year (FY 2011-12) are the last two years in which you can invest in one of the most remunerative & efficient tax saving instrument available in India today.

To sum up, 4 strong reasons to Invest in Tax Saving Mutual Funds (ELSS):-

1. It helps you save on your taxes and at the same time you can take exposure to the equity market
2. Minimum lock-in period of just 3 years amongst entire bouquet of tax savings instruments
3. One of the most remunerative tax saving investment avenue (12 to 15% pa CAGR returns over 5 years)
4. The current financial year (FY 2010-11) and the next Financial Year (FY 2011-12) are the last two years in which you & I can invest in Tax Saving Mutual Funds as under the DTC regime, this wonderfull tax investment avenue will cease to exist.

So, grab the opportunity & invest in TAX SAVING MUTUAL Funds before March 31^st…..

(Just one caveat here; currently more than 25 Tax Saving Mutual Funds is available in the market; do your research well & consult a Mutual Fund Expert before choosing the right fund for yourself)

Happy Investing…………..

A Financial Planner decodes The Direct Taxes Code (DTC) 2010 Sep 01, 2010

A Financial Planner decodes The Direct Taxes Code (DTC) 2010

Sep 01, 2010

The Direct Taxes Code 2010 (DTC) 2010 became a reality after good 50 odd years on Aug 31, 2010, when the FM introduced the bill in the parliament. The Income Tax Act 1961 as well as The Wealth Tax Act 1957 has finally been replaced by The Direct Taxes Code 2010. So how have things changed for the average Indian after 50 years?

Well, not much.

The original DTC Draft

When the 1st draft of the DTC was proposed almost a year back, it raised great expectations as it was supposed to herald a new era of direct taxation. The IT slabs proposed were unthinkable, unimaginable even a year back.

The corporate tax rate was proposed to be reduced in one shot from the present 33% to 25% and this move was applauded by one and all. The IT slabs proposed for individuals were supposed to be path breaking. 30% tax bracket was applicable only if your total income exceeded Rs. 25 lacs. Up to Rs. 3 lacs deduction from gross total income was proposed to be allowed.

There were also a few proposals in the original draft that ruffled a few feathers especially in the corporate world and faced lot of resistances. The Minimum Alternate Tax (MAT) was proposed on assets as against book profits and was opposed tooth and nail by the corporate. Another proposal that created disturbances was the proposal to levy tax on long term capital gains which otherwise was tax free. One more concern was that Rs. 1.50 lacs deduction available for interest payments on home loan. It was feared that this deduction might go way.

Final avatar of The Direct Taxes Code (DTC) 2010

When on Aug 31, 2010, the final avatar of DTC 2010 was revealed, some dreams got shattered and some nightmares thankfully did not come true. The biggest dream that got shattered was the revelation of the new Income tax slabs that would be effective April 1, 2012. Have a look at the graphic below.

Personal Income Tax Rates for Individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):

Income Tax Rate (%)	Current under The Income Tax Act’ 1961	As proposed in the 1st DTC draft (Aug 2009)	As per the final DTC  2010 (Aug 2010)
Basic exemption limit – Male assesses	Rs. 1.60 lacs	Rs. 1.60 lacs	Rs. 2.00 lacs
Women assesses	Rs. 1.90 lacs	Rs. 1.90 lacs	Rs. 2.00 lacs
Senior Citizens	Rs. 2.40 lacs	Rs. 2.40 lacs	Rs. 2.50 lacs
10 % tax bracket	Up to Rs. 5.00 lacs	Up to Rs. 10.00 lacs	Up to Rs. 5.00 lacs
20% tax bracket	Rs. 5.00  to 8.00 lacs	Rs. 10.00  to 25.00 lacs	Rs. 5.00  to 10.00 lacs
30% tax bracket	Above Rs. 8.00 lacs	Above Rs. 25.00 lacs	Above Rs. 10.00 lacs
Deductions from Gross Total Income	Rs. 1 lac (Sec 80C)+ Rs. 15,000 (Sec 80D)+ Rs. 20,000 (Infra Bonds) = Rs. 1.35 lacs total dedn.	Rs. 3 lacs	Rs. 1.50 lac (Sec 80C)
Corporate Tax Rate	33% (including cess & surcharge)	25%	30% (net)

As is evident from the table above, as per the draft DTC proposal of Aug 2009, one would fall in the 30% tax bracket only if your Gross Total Income exceeds Rs. 25 lacs. This would have been an extraordinary move had it been approved. Approximately 90% of Indian Income Tax payers would have fallen in either 10% or 20% tax bracket which would have improved tax compliance and consequently Govts’ revenues from direct taxes as history shows that whenever the Govt. has reduced taxes, tax compliance has improved and has resulted in increasing revenues for the Govt. coffers.

Unfortunately the final code of Aug 2010 revealed that with a Gross Total Income of mere Rs. 10 lacs, one falls in the 30% tax bracket. This is a mere Rs. 2 lacs increment over the existing tax slab as per The Income Tax Act 1961. The question that comes in mind is that this slight change could have been made in the next year’s budget. Why the need for a Direct Tax Code.

Again, the total deductions from Gross Total Income that are allowed today as per The Income Tax Act, 1961 add up to Rs. 1.35 lacs. This was proposed to be increased to Rs. 3 lacs in the Draft DTC of Aug 2009. Unfortunately, there was disappointment on this front as well. The total deductions have been marginally increased by just Rs. 15,000 from Rs. 1.35 lacs currently to Rs. 1.50 lacs as proposed in The DTC 2010. Again, why the need for a Direct Tax Code to implement a minor change.

Another disappointment is the drastic reduction in the choices available to an average Indian to claim deductions from Gross total income. While the current Income Tax Act offers a wide array of savings & investment products to choose from based on an investors profile like PPF, NSC, KVP, 5 year Bank FDs etc. for the risk averse investors; Tax Saving Mutual Funds (or ELSS) & Insurance Plans & ULIPs for those who want to have market exposure and also a deduction for principal repayment of home loans and additional deduction of Rs. 20,000 for infrastructure bonds.

Unfortunately, and this is one of the biggest disappointment from the DTC 2010 from a financial planner’s perspective that the proposed set of savings & investment avenues allowed under The DTC 2010 is just half of the choices already available today. Have a look at the graphic below:

Also, while currently, women assesses are given preferential treatment by having a higher exemption limit of Rs. 1.90 lacs v/s Rs. 1.60 lacs for male assesses, The DTC 2010 has removed this distinction and has a common exemption limit of Rs. 2.00 lacs for both male & female assesses. This comes as a disappointment for the women.

Comparison of Deductions allowed:

Types of Deductions available	Currently under The Income Tax Act 1961	As proposed in The DTC 2010
Traditional savings instruments	PPF, GPF, EPF, NSC, KVP, 5 year Bank FDs, Post Office Schemes etc.	Approved Funds like PF, GPF, EPF, PPF etc, superannuation or gratuity funds, Pension Funds & other funds approved by the GOI.
Market Linked Investments	Tax Saving Mutual Funds (or ELSS) & ULIPs	None
Pension Schemes	The New Pension Scheme (NPS)	The New Pension Scheme (NPS)
Expenditure allowed	Tution Fees of max. 2 children & Repayment of Home Loan principal	Tution Fees of max. 2 children only
Medical Premia	Available separately u/s 80D with a limit of Rs. 15,000 over and above Rs. 1 lac available u/s 80C (Rs. 20,000 in case of Mediclaim for parents who are senior citizens)	Medical Premia payments made for family clubbed with other deductions & no separate limit given
Life Insurance	Life Insurance Premia payable for insurance policies of family allowed; all products	Premia payable on only pure life insurance policies (where amount of premium paid < 5% of sum assured) allowed.
Infrastructure Bonds	Investment in Infra bonds issued by infrastructure NBFCs approved by GOI up to a max of Rs. 20,000 over and above Rs. 1 lacs u/s 80C & Rs. 15,000	No deductions for Infra Bonds
Interest expenses on Home Loan	Deduction up to Rs. 1.50 lacs allowed	Deduction up to Rs. 1.50 lacs allowed
Total Deductions allowed >>>	Rs. 1.35 lacs + Rs. 1.50 lacs = Rs. 2.85 lacs	Rs. 1.50 lacs+ Rs. 1.50 lacs = Rs. 3.00 lacs

As is clear from the above table, the incremental deduction allowable under The DTC 2010 over the existing Income Tax Act is mere Rs. 15,000. Much ado about nothing…

Also, a whole host of investment avenues like NSC, KVP, Post Office Schemes, 5 year Bank FDs, Tax Saving Mutual Funds, and Insurance plans are no more eligible for tax deductions.

From more than a dozen savings and investment avenues available today, the DTC 2010 proposes to reduce the choice to less than half a dozen. This according to me is the biggest disappointment from the retail investor’s perspective. A wonderful investment avenue like Tax Saving Mutual Funds (or ELSS) no more figures in the allowable deductions. Even traditional favorites like NSC, KVP, Post Office Schemes do not have a mention in The DTC 2010.

One pain area though is the levy of 5% dividend distribution tax (DDT) ie; dividends paid by companies on shares as well as dividend payments by mutual funds shall both be subject to a 5% dividend distribution tax (DDT). As of now, dividends are tax free. This move was uncalled for as many investors, especially senior citizens, currently invest in Mutual Funds so as to earn regular dividend income from them for their daily needs. This dividend income will now be affected adversely.

So what is good about The DTC 2010

However, there is a silver lining in The DTC 2010. Certain nightmares did not come true. The biggest nightmare was disallowing the Rs. 1.50 lacs deduction for interest payments on home loan. The stock market was terrified at the prospect of levy of a tax on long term capital gain which as of now is tax free. Fortunately, both the above nightmares did not come true. The deduction of up to Rs. 1.50 lacs for interest payments on home loan is going to be allowed under The DTC 2010 & long term capital gains continues to be tax free under the DTC regime. There was one more positive surprise in the DTC. The reduction in rates levied on Short Term Capital Gains (STCG).

As of today, STCG are taxed @ 15% irrespective of our tax slabs. Thus a person in 10% tax bracket is taxed @ 15% on his STCG as also a person who is in 30% tax bracket. This was not being fair with the guy in the 10% tax bracket. This anomaly has now been done away with in The DTC 2010. Have a look at the graphic below.

Taxation of Capital Gains

Particulars	Currently under The Income Tax Act 1961	As proposed under The DTC 2010
Tax on Short Term Capital Gains
10% tax bracket	15%	5%
20% tax bracket	15%	10%
30% tax bracket	15%	15%
Tax on Long Term Capital Gains	Tax free	Tax free

As is evident from the table above, under The DTC 2010, you shall now have to pay a much reduced tax on you Short Term Capital Gains @ 50% of your tax bracket. This is a very welcome move and the FM should be applauded for the same.

Conclusion

When the current congress Govt. took charge, an ambitious Minister announced mega plans of building 20KMS of National Highway every day. We all know what the reality is today and are aware of the huge gap between actual road building and mega plans announced then.

Something similar has happened with The Direct Taxes Code 2010. It was announced in Aug 2009 with great fanfare and promises of a new era in direct tax collection. Exactly 1 year later, The DTC 2010 has turned out to be a big dampener and looks like the twin brother of the existing Income Tax Act 1961 and nothing more. In our opinion, The Direct Tax Code 2010 is an opportunity missed and the only plausible reason seems to be the lack of political will. One more minister succumbs to political pressure and fails to walk along the unbeaten path.

To sum up, the New Direct Taxes Code is Very Old Wine in not so New Bottle……