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Now Try Balancing Your Budget....

Budget 2002 has been tough. But the silver lining is that you can get the freedom to take charge of your financial destiny without being constrained by inapt tax saving investment. The first step should be to work on a plan. And to make it work, you have the wide-ranging investment choices available today. As the going gets tough, the tough gets going. Indeed, it will be more rewarding too.

Don't shoot the messenger. Sinha had no option but to hit your wallet this time: the government desperately needs the money. He has also been very Fabian about taking your money. The 'rich' will lose more. Let's look at how the budget is going to change your investment landscape:

1. Dividend from mutual fund is no longer tax-free in the hands of investor: The dividend distribution tax on funds has been abolished. Till now, only the open-ended with less than 50% in equities and the closed-end schemes were subject to a dividend tax of 10.2 percent. The dividend from open-end equity fund was not even subject to distribution tax.

This will reduce you total return. But if you invest with a minimum time horizon of 1-yeat, it does not matter. Investment in the growth plan of a fund and realise your gains in part or full after 1-year, you will be liable for capital gains tax. As the capital gains tax structure remains unchanged, it will be beneficial for you to realise your gains in the form of capital gains. The capital gains tax is lower -- a flat 10 percent or 20 per cent after indexation. And systematic withdrawal plans of funds will help you do this with ease. Look forward to more frequent bonus units from funds now, as it will be the tax-efficient mode of distribution. And its can also throw opportunities to offset your short-term losses with short-term gains.

2. Interest rates on small savings will be market determined and revised annually. This will be based on the average actual yield on a benchmark government security. As a starter, the rate on all small savings has been lowered to 9 percent, down 50 basis points. Similarly, the rate on Government of India Tax-free Bonds has been reduced to 8 percent. An investment ceiling of Rs 2 lakh has also been imposed on the tax-free bonds bought by every individual or entity.

The returns from small savings go down. It hurts the retirees most – who depend on fixed income from investment with high safety. Since the reduction in rates was actually lower than the market expectations, bond fund may be hurt in the short-term. However, given the decline in rates and the ceiling on investment in tax-free bonds, the relative attractiveness of mutual funds is likely to go up soon. But there is a silver lining to this -- With safe and administered savings options getting marginalised and less attractive, investors can exercise greater control on their financial destiny with wide ranging funds.

3. Introduction of slabs to avail tax rebate u/s 88 of the Income Tax Act. The 20 percent rebate will be applicable to citizens earning income up to Rs 1.5 lakh. For income between Rs 1.5 lakh and Rs 5 lakh, the tax rebate will be 10 percent. And all individuals with incomes above Rs 5 lakh will not be eligible for any tax rebate.

One has to live with this. Big earners lose a major incentive to invest in tax-saving instruments. But the bright side is that you will enjoy the financial freedom with all your post tax savings, without being constrained by forced and inapt tax-saving investments.

4. Indian Mutual Funds can now invest in the rated securities of foreign countries. They are already allowed to invest in the ADRs/ and GDRs, subject to a ceiling of 10 per cent of net assets managed. The total investments that can be made by the fund industry are capped at $500 million.

Theoretically, bond funds can cast their investment net wider to give you better returns. But will that really happen? Consider: Three years ago, domestic funds were allowed to invest in overseas equity, a measure that is stillborn since the regulatory go-ahead hasn't been given so far.

5. Although the income tax slabs have been untouched, the 2 percent Gujarat earthquake surcharge has been replaced with a 5 percent national security surcharge on all incomes above Rs 60,000 p.a.

The tax rates for investors falling in the second tax slab- Rs 60,000-Rs 1,50,000 will be 21 percent, and for those in the highest tax slab, the rate of taxation will be bumped up to 31.5 percent.

The only way to combat the taxing implications of Budget 2002 is to fully leverage the greater financial freedom you will enjoy. And the way is to take charge of your financial destiny – with a suitable financial plan. And it will be easy given the wide-ranging investment choices available. As the going gets tough, the tough gets going. And it will be more rewarding for the tough.