Union Budget 2009-10: Expectations run high! Last one year has been a tumultuous one for all - the common man as well as the investor. So whether it is the stock market crash, job losses or fading job opportunities, it entangled one and all. Though the current scenario is better compared to what it was eight months back, a lot of ground is still needed to be captured. Hence, while every year there is expectations attached to the Union Budget; this time around, and expectedly, it’s relatively high. This is one thing that will play on the Finance Minister’s mind, when he presents the Union Budget on July 6, 2009. And for sure, he has an uphill task to accomplish - to appease all.
In our pre-budget analysis we outline some issues that would top individuals’ wish list as far as their finances are concerned.
1. Section 80C limit should be enhanced further
Section 80C of the Income Tax Act provides for deduction upto Rs 100,000 from gross total income. Over the years, the avenues that have come under the bracket of Section 80C have increased, but the deduction limit has remained the same. In present situation, to enable investors to make the maximum benefit from Section 80C, it would be desirable to enhance the limit.
Payment of life insurance premium, repayment of home loan principal, investment in Equity Linked Savings Scheme (ELSS), deposits into Public Provident Fund (PPF) among others qualify as eligible investments/payments under Section 80C.
2. Scale-up exemption on home loans
An EMI (equated monthly installment) on a loan has two components – principal and interest. In case of home loans, buyers get the benefit of deduction under Section 80C (upto a maximum limit of Rs 100,000) on the repayment of principal. Besides, the interest paid on loan qualifies for deduction upto Rs 150,000 under a separate Section of the Income Tax Act.
Over the past few years, property prices have gone through the roof, especially in metro cities like Mumbai, Delhi and Chennai among others. In our view, the deduction limits need to be increased to account for the increase in price. Also, this move will have a positive impact on housing and allied industry like steel and cement.
3. Abolish surcharge and education cess
Surcharge and education cess have continued for sometime now. Surcharge by its very nature is temporary and meant for a special purpose. Tax on tax, in our view is a sign of poor fiscal management. It is high time that surcharge and education cess are abolished.
4. Equity fund status for Equity-oriented Fund of Funds
Arguably, this one is one of the classic examples of the skewed taxation structure in the mutual fund industry. At present, fund of funds that invests in equity-oriented mutual funds are classified as debt funds for the purpose of taxation. In our view, there is no reason why they should be excluded from the ambit of equity-oriented funds. For long, there has been a demand from all quarters of the mutual fund industry to treat equity-oriented fund of funds as equity funds. And we expect that at least this time around, the Finance Minister would pay head to this demand.
5. Tax sops for New Pension Scheme (NPS)
Since its launch on May 1, 2009, there has been a poor response to NPS. One of the many reasons for this is its unattractive tax structure. Currently, contributions to NPS by a salaried individual qualify for deduction under Section 80CCD. This is further subject to the condition that the contibution should not exceed10% of the salary. During the period of accumulation, NPS is exempt from tax, just like any other tax saving scheme. However, withdrawals from NPS are taxable.
In our view, contributions to NPS should fall under Section 80C to bring it on par with other popular avenues like Public Provident Fund (PPF) and National Savings Certificate (NSC).
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