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Low Impact Budget for Personal Savings

A broad continuity and lack of surprises means that investors should stick to whatever strategy was otherwise suited to them

As soon as the Finance Minister’s budget speech was over, the country was hit by a severe shortage of opinions. All across the land, people were desperately searching for opinions on the budget but were coming up short. Actually, that isn’t really true. There were plenty of opinions, but they mostly didn’t actually say anything, and through no fault of their own. All those who thought that the government would try and do something dramatic to recapture the high ground and move the news flow past corruption and inflation were disappointed. Despite the usual hype from the electronic media, it was very much a slow news day. Realistically, nothing much was expected, and the budget measured up to that expectation very well.

In the personal finance realm, the budget made a handful of changes. Mainly, the tax exemption limit was raised from the current Rs 1.6 lakh to Rs 1.8 lakh. Unfortunately, there had been so much talk of a Rs 2 lakh limit that this almost came across as a disappointment through no fault of the FM. However, there is a deeper issue about the exemption limit and the way it is decided.

The limit has been increased by 12.5 per cent. This doesn’t even cover the real rate of inflation that ordinary salary-earners are facing. Finance ministers have made a practice of doling out these paltry increases with the air of bestowing some great largesse. However, the actual quanta of the increases in the exemption limit and the tax slabs never manages to keep pace with the real inflation rate. The fairer alternative would be to make these increases automated, and the percentage based on an inflation-linked index. Inflation-linked adjustment to taxes is not an unfamiliar concept. It is already done for long-term capital gains. It is ironic that capital gains—which are generally earned by the more affluent class—are automatically adjusted for inflation every year while salary-earners have to make do with these meagre scraps thrown at them.

Another major change the finance minister has made followed the example of his colleague from Bengal and changed the definition of senior citizen. Now, the tax laws consider you to be old at the age of 60 instead of 65. This is actually an interesting change because in many jobs, retirement comes after 60. The last two or four years of many tax-payer’s working career will get a welcome income boost. The Finance Minister also went one step beyond the Railway Minister in creating a new Very Senior Citizen category. I guess this principle can be extended further in future budgets whenever an FM is short of things to say. Eventually, we could have super senior citizens and ultra senior citizens, with 100 years and 120 years as the respective age limits. The revenue impact of the concessions will surely be minimal. On a different note, it’s great to see that the government is steadfast in its efforts to encourage the uptake of the New Pension System (NPS). This continues a welcome trend in the last budget. The ‘Swalamban’ scheme, which gives what is effectively a subsidy for small depositors to join the NPS was extended and made more beneficial. Getting members from the unorganised sector into the NPS will need continuous attention, and this scheme is just the kind of encouragement that is needed. There was also a change which will allow employers’ NPS contributions to be classified as a business expense, something that wasn’t done earlier.

In mutual funds, there’s no major change for retail investors. For corporate investors, the dividend distribution tax on debt fund investments has been increased, removing their tax advantage over bank deposits. The mutual fund industry has been permitted to get foreign investors directly. This opens up a new route for bringing foreign money into Indian equity, and is something that should bring cheer to the AMCs as well as the markets.