What has budget 2014-15 left on the aam admi's plate?     (10-Jul-2014 )



The first budget of the Modi-led-NDA Government was tight rope walk in its commitment to the path of fiscal consolidation. Finance minister, Mr Arun Jaitley in his budget speech said, "We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline." Placing fiscal prudence on paramount importance, the intent to improve the tax-to-GDP ratio was also made explicit.

Thus, when the finance minister turned to part B of his budget speech, which enunciates the tax proposals, there was only a mild shade of populism as far as direct taxes are concerned.

Tax Rates and Basic Exemption limits
The income tax rates for individuals were kept untouched. However, providing some relief to the aam admi who voted the Modi-led-NDA Government to power by a thumping majority, the basic exemption limits for individual tax payers below 60 years of age and senior citizens (i.e. over 60 years of age) was increased by Rs 50,000 each. For individual tax payers below 60 years of age the exemption limit is increased from Rs 2 lakh to Rs 2.5 lakh, while for senior citizens from Rs 2.5 lakh from Rs 3 lakh.

The surcharge and education cess however, was kept unchanged at 10.0% and 3.0% respectively.

Deduction Limits
Recognising the drop in gross domestic savings to 30.1% in year 2012-13, from 33.7% in year 2009-10; in a move aimed at improve savings and its productive use to clock better economic growth; the finance minister also proposed an increase in investment limit under section 80C of the Income Tax Act, 1961 from Rs 1.0 lakh to Rs 1.5 lakh, whereby the tax payers can now enjoy an enhanced deduction, subject to the utilisation of the limits prescribed.

And possibly as a synchronisation to the above move, the finance minister also proposed an enhancement in the annual investment ceiling in the Public Provident Fund (PPF) scheme to Rs 1.5 lakh from Rs 1.0 lakh at present. Likewise Kissan Vikas Patra (KVP) which was a very popular instrument among small savers is also proposed to be re-introduced to encourage people who may have banked and unbanked savings to invest. It was also proposed to provide additional benefits to small savers by launching a National Savings Certificate (NSC) along with an insurance cover and also have special small savings instrument to cater to the requirements of education and marriage of the girl child.

Also, as housing continues to be an area of concern for middle and lower-middle class family due to high cost of financing (due to an elevated interest rate scenario) and rise in property prices, the finance minister also proposed to increase the deduction limit available under section 24(b) of the Income Tax Act, 1961 in respect of Self Occupied Property (SOP) from Rs 1.5 lakh to Rs 2lakh, as measure to reduce the burden of such tax payers. This move may also encourage and bring relief to individuals who wish to take housing loans to buy their dream home.

Long Term Capital Gains Tax
Then you see, in case of mutual funds other than equity oriented funds, it has been proposed to increase the rate of tax on Long Term Capital Gain (LTCG) from 10.0% to 20.0% on transfer of units of such funds. Moreover, it is proposed to increase the period of holding in respect of such funds (to be categorised as LTCG) from 12 months to 36 months.

Such a proposal now eliminates the tax arbitrage which existed until now, where debt mutual funds were tax efficient in comparison to direct investments in bank fixed deposits. The proposal places bank fixed deposits and debt mutual funds almost parallel. And by doing so, PersonalFN believes going forward Fixed Maturity Plans (FMPs) will not continue to offer double-indexation benefit (as they did) if the investment tenure is lower than 36 months. In the absence of a tax arbitrage, even investors would not be enthused to bear a risk premium for little additional returns. This proposal may discourage short term parking in debt mutual funds and may therefore pose a challenge for mutual funds promoting debt mutual fund schemes.

To conclude...
Overall while the budget 2014-15 did have mild shades of populism, it has left something on the plate of the common man. Having said that, PersonalFN believes the Modi-led-Government could have kept in pace with changing times and revised the age-old limits of conveyance allowance, education allowance and hostel allowance. Likewise, the limit for health insurance premium payment under section 80D could have been increased, by say at least Rs 5,000 (placing the deduction limit at Rs 20,000), recognising that inflation in healthcare is on a rise.

The Modi-led-NDA Government has depicted its commitment to fiscal consolidation. It has decided to achieve the fiscal deficit target (set by the predecessor) of 4.1% of GDP for the fiscal year 2014-15 and reduce it further to 3.6% in fiscal year 2015-16, followed by 3.0% in 2016-17. But finally, it remains to be seen whether the Government in power, can walk the talk on key triumvirates - inflation, fiscal deficit and economic growth - and indeed show 'acche din' to the aam admi.

Watch-out for our weekend edition of the Financial News.Simplified for detailed analysis of Budget 2014-15.

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