On the eve of budget 2013, there was a lot of hope that the finance minister will address the middle class investors concerns on increasing inflation by increasing the tax exemption slab and provide more deductions on tax saving investments. But budget 2013 has just been unraveled and the initial reaction is that of some disappointment on the investor's front as a lot could have been done. I present you the highlights and the aspects of the budget related to investments.
Tax free bonds: In order to provide a boost to the infrastructure sector, infrastructure finance companies have been allowed to issue tax free bonds to the tune of Rs. 50000 crores in the next financial year. This is good for investors in the highest tax slab as it would provide assured and better long term returns than fixed deposits. But considering the fact the interest rates are likely to fall going ahead, it has to be seen what rates the issuers will offer.
Inflation indexed bonds: The government in consultation with RBI has proposed to introduce " Inflation indexed bonds" or savings certificates in order to help investors provide a hedge against inflation. This will ensure that investors have a better fixed income alternative to combat inflation. Only the tenure and tax implications, which will be announced later, will decide if this turns out to be a good alternative or not. These bonds are linked to inflation rates and the interest rates are periodically reset to take care of varying inflation rates.
Additional Deduction on 1st home loan: First time home loan seekers upto Rs 25 lakhs will be eligible for an additional interest deduction of Rs 1 lakh provided they take a loan in financial year 2013-14. This would amount to a total interest deduction of Rs. 2.5 lakhs which is a great positive. If the limit is not utilized in the financial year 2013-14, then the balance can be carried forward in the next financial year. Considering the present home loan interest rate of 10.5% for a 15 year period, the total additional savings will be Rs. 20000 if the investor is in the 20% tax slab and Rs. 30000 if he is in the 30% tax slab. This benefit is likely to spur first time home buyers into finally buying their dream home.
Rajiv Gandhi Equity Savings Scheme (RGESS): The much delayed scheme has been proposed to be extended for 3 successive financial years and the income eligibility criteria has also been raised from Rs. 10 lakhs to 12 lakhs for next year. Under this scheme one can invest in specified stocks, Exchange traded funds or mutual funds upto Rs. 50000 a year and claim a deduction of Rs. 25000. The compulsory redemption of this scheme after 3 years is a dampener though as at the time of redemption if the markets are down, the returns might get affected.
TDS on property: From next financial year, on the sale of any property worth Rs. 50 lakhs and above there will be a compulsory deduction of TDS at the rate of 1%. This may increase paperwork for claiming the deduction for investors especially if the sale proceeds are to be invested in capital gains instruments or another property for saving tax.
No change in Capital gains tax norms & STT: With the finance minister mentioning that the DTC (direct tax code) will be revised and introduced in the budget session, as of now the short term and long term capital gains tax parameters remain as they were earlier. Even the STT (securities transaction tax) for equities and mutual segment has been retained while the same has been reduced for equities futures category and non agricultural commodities.
It is very likely that the DTC may get the nod during the budget session and get implemented too in this financial year. That may be one of the reasons that the finance minister did not tinker with the tax slabs. The only benefit that has been provided to investors is the Rs. 2000 tax credit for income tax slab ranging from Rs. 2 lakhs to 5 lakhs. One only hopes that there is more clarity at the earliest on DTC so investors can plan their investments at the beginning of the new financial year rather than having to react to last minute clarifications.
The author is a member of The Financial Planners' Guild, India (FPGI) . FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.
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