Finally, a Tax Reform of Substance Aug 14, 2009

Finally, a Tax Reform of Substance

Aug14, 2009

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Finally, a Tax Reform of Substance

Impact

Recently, the Finance Minister proposed the new Direct Tax Code that is likely to be effective from 2011. This proposed Code will in effect replace the Income Tax Act, 1961. Broadly it proposes to:

Raise the tax slabs for individuals substantially as per the table below:

Tax Rate	Existing (Rs)	Proposed (Rs)
Nil	160,000	160,000
10%	160,001-300,000	160,001-1,000,000
20%	300,001-500,000	1,000,001-2,500,000
30%	Above 500,000	Above 2,500,000

(Source: Direct Tax Code Bill, 2009)

Increase the Section 80C limit from Rs 1 lacs to Rs 3 lacs

Make the investments in saving schemes like provident fund, life insurance, New Pension Schemes, EET (Exempt-Exempt-Tax). This will be applicable to all contributions made after the commencement of the Code

Scrap the exemption on the interest on home loans of Rs 1.5 lacs

Abolish Securities Transaction Tax (STT). This will bring down the transaction cost for investors

Remove the distinction between short-term and long-term Capital Gains Tax. This means capital gains will be taxed irrespective of the investment horizon

Raise the wealth tax limit to Rs 500 lacs and lower the rate to 0.25%

The new Direct Tax Code has to be first passed by Parliament before it can be implemented. When implemented, it will boost savings of individuals.

It's an interest rate war - Home buyers to benefit the most

Impact

Most often than not competition is good; especially if it is between institutions (read companies) competing to attain leadership in their functional areas, because this is when customers get the opportunity to benefit the most. Currently, the home loan market is experiencing stiff competition for market share. Recently, both SBI and HDFC have upped the ante for market share in the home loan market with their new (and rather ambitious) interest rate structure.

Triggering the competition was SBI's move to offer loans of upto Rs 5 lacs at a fixed rate of 8% p.a. for five years. Furthermore, it has also cut rates by 50-75 basis points for loans in the range of Rs 30 lacs to Rs 50 lacs. For the same segment, HDFC has reduced its interest rates by 50 bps to 9% pa; thus intensifying the competition.

What the big three are offering

	For floating rate home loans for amount of Rs 30 Lacs to Rs 50 Lacs.
	1st year (%)	2nd Year (%)	3rd Year (%)	4th year onwards (%)
HDFC	9.00	9.00	9.00	9.00
SBI	8.00	8.50	8.50	PL-275bps
ICICI	9.75	9.75	9.75	9.75

(Source: Newspapers and websites of respective HFCs/banks. Rates of SBI and HDFC are after the recent cut)

The graph below depicts the interest rates charged by some of the major banks and housing finance companies (HFC) in the industry in the Rs 30 lacs to Rs 50 lacs segment.

Floating rate home loans from some of the leading HFCs/Banks

(Source: Newspapers and websites of respective HFCs/banks.)
(The rates are applicable for the first 5 years. SBI's rate is for the first year, for subsequent years - refer to the table above. The rates are indicative in nature. Individuals would do well to check the same with respective HFCs/banks before taking a final decision.)
At Personal FN, we believe that if you are planning to buy a house, this is the right time to do so. Property prices are down and so are the interest rates on home loans. What else can anyone ask for! However, before you take a loan, besides the home loan rates you should also enquire if there are any hidden charges. Once you are fully conversant with all the terms and conditions, it is then you should sign on the dotted line.

No more discrimination - Fund houses to charge uniform exit load

Impact

Cracking the whip on the mutual fund houses once again, SEBI has asked them not to charge different exit loads for different categories of investors. Until now, the exit loads on equity investments were charged depending on the amount of investments made (refer to the table below).

Exit load structure in case of equity funds

Investment Amount	Exit Load
Less than Rs 5 Cr. (in some cases Rs 2 Cr)	1%
More than Rs 5 Cr	Nil (in most cases)

In the case of fixed income funds as well, institutional investors were not charged an exit load if they invested beyond a specified limit. However, retail investors were charged 0.5% as an exit load for premature withdrawals (exit load time limit may be between six months and one year). But now, the days of differential exit load regime are passé. SEBI has clearly told all fund houses that they can charge exit load within the existing limit of 7%, but without discriminating against any category of investors.

While its still not clear as to how fund houses are going to implement these changes; at Personal FN we have always emphasised that the fund houses should give due importance to the interest of retail investors. In our opinion, the concept of different exit loads for different categories of investors shouldn't have been there at all. And given that it has been scrapped now, this is exactly in line with what we have always believed in.

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