Budget 2012 – What’s in it for you!

Whilst the expectations from the budget were low, many of us were hoping that the budget would try to push the envelope since it was the last real opportunity for the UPA government to push through reforms. However, it seems like the government did not try to do anything dramatic, lest Mamta insists that the Finance Minister should resign, along with the rail minister.  So we will celebrate Sachin’s 100^th 100 today instead of the budget.

The early assessment of the budget and what’s in it for you:

Your Income

• Gender equality is one step closer in India, at least as far as tax laws are concerned. The minimum  tax exempt income slab is now Rs. 2 lakhs for both men and women.
• The Direct Tax Code (DTC) has been deferred. There has been a marginal tinkering with the tax slabs, with income upto Rs. 2 lakhs  being exempt. For the Rs. 2 – 5 lakhs slab, tax rate is 10%, and 20% for the next slab of Rs. 5 – 10 lakhs. The highest tax slab now starting at an income above Rs. 10 lakhs is to be taxed at 30%. Whilst this is clearly not a significant rationalization in the taxation rates on personal taxes,  it aligns it with the proposed DTC so we are hopefully a step closer to the DTC.
• For anyone in the highest tax bracket (earning above Rs 10 lakhs), expect a saving of Rs. 22600.  It is important to ensure that you put this saving to good use i.e. to your highest priority financial goal.
• Exemption of an amount of Rs. 10000 for interest earned on savings accounts. In addition to some marginal savings, the biggest advantage is probably the administrative ease that comes with knowing that if you manage your savings account without excessive balances, you are saved from running around to collect your interest certificates for savings accounts at the end of the year from multiple banks.

Your Expenses

• If you have a marriage coming up soon, be ready to pay more for gold and silver. Customs duties on gold and silver have both been hiked.
• Cars will become more expensive with an excise duty hike, and yes, it does not matter whether the car runs on diesel or petrol, for now.
•  Expect prices of consumer durables to go up – TV, Acs, refrigerators, washing machines and microwave ovens could be 2-4% more expensive.
• Expect to pay more for most services for e.g. telephones, as service tax has been raised from 10% to 12% and most services except 17 are now covered under the ambit of service tax.
• You  can expect a deduction of Rs. 5000 for a preventive health checkup
• Expect inflation to creep up once again as the government continues its borrowing program unabated – plans to raise a gross borrowing of Rs 5.7 lakh crores this year. Interest rates may therefore not come down as quickly as a lot of people expected.

Your Assets and Liabilities

Equity Assets

•  Another new program named after Rajiv Gandhi ( no one wonders why?) allows retail investors with income upto Rs. 10 lakhs to get a 50% tax deduction on investments in equities upto Rs. 50000, with a 3 year lock in. This should help in increasing retail participation in equity markets to a certain extent.
•  While equity markets may be driven in the short term by reactions to the budget , we believe that the markets  will ultimately be driven by global oil prices and liquidity flows from overseas. The markets are already pricing in a large portion of concerns like input cost inflation and higher interest rates. Since valuations are currently still attractive, look at enhancing equity exposures on declines vis a vis your overall asset allocation strategy. Expect returns to be in line with long term corporate earnings growth of 15-20% per annum over the next 3 years.  A key factor to watch out for will be tensions in the Middle East, which can take oil prices higher.
•  The Securities Transaction Tax (STT) has got lowered by 20% which may be marginally beneficial for investors.

Fixed Income Assets

•  The expected government borrowing numbers and slippages on the fiscal deficit front are negative for long term yields and bonds. We therefore believe it is prudent to remain at the shorter end of the yield curve i.e. in the 1-3 year product , with a 6 to 9 month view.  The use of short term bonds funds and Fixed Maturity Plans ( FMPs) is recommended.
•  Enhancements in tax free bond limits like NHAI, HUDCO, IRFC will probably result in more issuances in this space, which should be good for investors in the highest tax bracket.
•  With Qualified FIIs allowed to access corporate bond markets, that should result in increased liquidity in corporate bond markets over a period of time.
•  You could expect to pay more for insurance policies as well due to service tax increases.

Real Estate Assets

•  Tax deduction at source has been introduced on sale of real estate ( except agricultural land) at the rate of 1% with effect from Oct 1, 2012. This applies to all transactions above Rs. 50 lakhs in specified urban areas and Rs. 20 lakhs in other areas. Since property registration will not be permitted without proof of deduction and payment of this TDS, it could increase paperwork.

Loans and Liabilities

•  With interest rates likely to come down slowly due to inflationary concerns and high government borrowing, prepaying your loans may continue to be an important component of managing your finances. Of course, if you have a cheap fixed rate loan, you can let it be as is.

Author – Vishal Dhawan, CFP ^CM

Disclaimer : This document and the information contained therein is strictly confidential and meant strictly for the selected recipient and may not be copied or modified or transmitted without the consent of Plan Ahead Wealth Advisors Pvt. Ltd. This report is only for information purposes only and nothing should be construed to be of any investment advice.

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