Budget 2016 presented by FM Arun Jaitley in Parliament on Monday has hit a purple patch as far personal finance is concerned, although there are some raps as well for the common investor. While positive measures surrounding personal income tax, National Pension System, dividend tax distribution on Real Estate Investment Trusts and deduction for rent paid stood out, there are some sore points as well, such as the new tax regime on dividend income.
The existing income tax slabs remain intact with no changes. While reduction of personal taxes to combat rising inflation and costs was a common expectation, this remained unaddressed in the Budget 2016-17.
However, the ceiling on tax rebate under section 87A was raised from Rs 2,000 to Rs 5,000, benefiting individuals with income of up to Rs 5 lakhs. Another move in this regard was the tax relief on House Rent Allowance (HRA), which was increased from Rs 24,000 to Rs 60,000. This translates to an additional tax savings of Rs. 3,600 for tax payers in the 10% tax bracket.
An additional exemption of Rs 50,000 was announced for housing loans up to Rs 35 lakh for properties worth less than Rs 50 lakh. This brings an additional tax savings of Rs. 15,000 for those in the 30% tax bracket who make use of the additional exemption fully.
With the addition of 0.5% cess (called Krishi Kalyan Cess) on all taxable services, service tax outgo has been increased to 15%. With this, eating out at restaurants, paying utility bills and even insurance premiums become costlier. A lunch bill of Rs. 2,000 would now attract Rs. 10 more in ST + Cess. Over a year, this could translate to a few hundreds more in Cess alone.
However, service tax is exempted for housing projects for apartments up to 30 square meters in the four metros and up to 60 square meters in other cities. The service tax on single premium annuity insurance policies will be reduced from 3.5 per cent to 1.4 per cent on premium paid on certain cases. Service tax is also exempted for general insurance schemes under the NiramayiSwasthyaBimaYojana.
Though no new small savings schemes for tax or interest sops for small savings were introduced, the budget proposal has announced the payment of 8.33 per cent government contribution to new employees in the EPFO bracket for the first three years of their employment. Withdrawals from the National Pension System (NPS) on maturity will be tax-free up to 40 per cent of the corpus accumulated. As SEBI is to develop new derivative products, the coming years bode well for investors, with more competitive products in the offing.
Though loan interest rates were left untouched in this budget, the infusion of capital in education financing is likely to bring in new scopes for education loans. The Budget being reformist for start ups, start up loan seekers too can expect a good time in the coming days.
This budget is good for the insurance sector on a whole. The more relaxed FDI norms are sure to bring in more investments in the sector, which directly bestows insurance buyers with more competitive products and services. General insurance companies owned by the government will be listed on the stock exchanges. This is not only another investment platform for the investors, but will help these companies to stay competitive with more capital infusion.
Other budget announcements that impact personal finance
* The budget proposes to slap 10 per cent tax on dividend income over and above the limit of Rs 10 lakh.
* Surcharge on the super-rich with income exceeding Rs one crore raised from 12% to 15%.
* A dampener for the salaried class is that the government proposes to tax 60 per cent of the provident fund withdrawals after April 1, 2016. Until now, PF withdrawals were tax-free.
* The dividend distribution tax on Real Estate Investment Trust was scrapped, making this investment avenue more attractive for the investors.
* In sum, the Union Budget proposals relating to personal finance are tilted in favor of the common investor, with the positives outweighing the negatives, and represent a balanced budgeting exercise from the Government.
Founder & CEO, BankBazaar.com