Propulsion, but nowhere near escape velocity

Written by Rajiv Bajaj | Updated: Jul 11 2014, 14:09pm hrs
Having failed to meet the lofty expectations on big-bang reforms, the 2014-15 Budget could be termed more as a continuum budget than a reformist one.

The vision, however, has been set in terms of improving the fiscal position, boosting infrastructure spend in critical areas to jumpstart growth and improving agricultural productivity to control inflation. Also, the focus is on boosting household savings and channelising them into the financial sector, developing and deepening bond and currency markets and bringing about tax reforms to attract capital.

Other positive announcements include putting a timeline to the Goods & Services Tax, and excise and customs duty changes to boost domestic manufacturing, mining and power generation. Overall, it is a positive first-step towards reviving growth, controlling inflation and improving macro-stability.

For retail investors, there is good news on multiple fronts. There is potential for attractive investment gains over the medium to long term from different asset classes, such as equity (as growth returns) and debt (as real rate of return turns positive due to lower inflation and yields fall).

Steps like a uniform KYC norm and inter-usability of KYC records across the financial sector, along with introduction of a single operating demat account to give access to all financial assets, will encourage flow of household savings into capital markets.

Also, the erstwhile Kisan Vikas Patra is being revived and a small savings scheme for the girl child being launched. However, the fact that household savings are being pushed into outdated and low-yielding schemes rather than equity is disappointing.

The increase in the basic tax-exemption limit from R2 lakh to R2.5 lakh under Section 80 C and the hike in interest deduction limit on home loans can lead to tax savings of R5,150 to R39,655 every year.

The Budget seeks to eliminate the tax advantage of debt MF schemes over bank deposits. Gains arising on transfer of debt MF units before three years from the date of purchase will be treated as short-term capital gains and subject to normal rate of taxation. Even if the units are held for more than 36 months and qualify as long-term capital gains, they shall be taxed at 20%. The relative advantage of debt MF schemes in terms of post-tax returns has thus diminished. Nevertheless, they remain attractive in terms of liquidity and higher yields.

Retail investors will now be impacted more by a higher dividend distribution tax due to a tweak in the tax structure. For instance, though the DDT rate for individuals is unchanged at 28.325%, the effective tax paid has increased to 37.76% of the dividend received by the investor.

The retail investor should be happy with the Budget as it sets the tone for an economic revival in the long run and, yet, bestows significant tax benefits despite limited elbow room.