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Four reasons to cheer, four to worry about

Four reasons to cheer, four to worry about
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First Published: Tue, Mar 02 2010. 10 29 PM IST

Updated: Tue, Mar 02 2010. 10 29 PM IST
Now that the noise around Budget 2010-11 is over, we can take stock of the net effect on your money. While the finance minister has put more money in your wallets by expanding the tax slabs, there are fears that this money will buy less as prices are set to rise for two reasons. One, excise duty hikes have already made cars and consumer durables more expensive. Two, if the government doesn’t give in to the Opposition’s demand to rollback fuel price hike, overall prices will go up making inflation spill over from food to other areas as well.
Apart from these, the Budget has thrown some genuine reasons to cheer about, such as additional deduction on infrastructure bonds, but has left a lot to worry about in the service tax fineprint.
Tax slab expansion
With the tax slabs becoming bigger, you will now pay less tax. Keeping the minimum exemption limit intact, tax slabs have been expanded so that the maximum rate of 30% will now apply on those with an annual income of at least Rs8 lakh against Rs5 lakh earlier. The proposed tax slabs will be applicable from 2010-2011.
Says Vikas Vasal, executive director, KPMG: “The tax proposal is aimed at paving the way for the direct taxes code (DTC), which aims to give higher tax slab benefits and doing away with other deductions. Besides, it brought relief to taxpayers. The middle class, earning between Rs3 lakh and Rs8 lakh, would gain the most.”
Now, an individual earning Rs5 lakh would benefit by Rs12,600, as he would come under the 10% tax bracket against a 20% tax bracket. For an individual earning Rs10 lakh or more, the benefit would be about Rs57,680.
Rs20,000 extra deduction
Earlier, investments in infrastructure bonds came under section 80C deduction of up to Rs1 lakh. The government has now pulled them out and put them under section 80CCF, setting an additional deduction limit of Rs20,000.
This means that you can now get a deduction up to Rs1.2 lakh. Expect infrastructure bonds to make a comeback. Over the last few years, consumers gave these bonds a miss and went for tax-saving equity-linked savings schemes under the section 80C basket to get a equity kicker to their returns.
However, you need to watch out for two things. The fineprint says that infrastructure bonds will be notified by the Central government. Expect this notification to come in about a month or two, say industry experts. Till the notification comes, it is unclear whether private companies would be allowed to issue these bonds or whether the option to raise money by issuing bonds will be given only to government companies.
Another factor that needs to be clarified is the tenure of infrastructure bonds. Earlier, these bonds typically ran for a term of three to five years. However, Budget 2010 has specified that they would be “long-term infrastructure bonds”. It’s unclear how long-term they would actually be.
Also, interest income from the new bonds will be taxed now which were exempt from tax earlier, albeit up to an extent. This benefit was allowed under section 80L, which has long been abolished. Interests from such bonds are, therefore, likely to be taxed at your income tax rates.
NPS gets a push
To popularize the New Pension System (NPS) among the unorganized sector, the government will add Rs1,000 to every new account opened with a contribution between Rs1,000 and Rs12,000 per annum. The government will add Rs1,000 each for three consecutive years.
To give a thrust to NPS, which still has a customer base of about 4,000, the government has set aside Rs100 crore. We at Money Matters strongly recommend NPS as a definitive retirement vehicle you should opt for after you have exhausted your Employees Provident Fund (EPF) and Public Provident Fund (PPF). The lowest-cost investment vehicle, NPS makes your money available to you only at the age of 60 years.
However, in its current form, it faces a serious tax impediment—60% of its maturity proceeds are taxable. The remaining 40% buys you an annuity, a product that makes periodic payments to you. However, once DTC comes into effect, the product will become comparable with EPF and PPF.
You have two investment strategies to choose from. The first is active choice, wherein the investor can allocate funds across three fund options—equity, in which one can invest up to 50%, fixed income instruments other than government securities and government securities. Under the second option, auto choice, you will be automatically allocated 50% equity till the age of 35 years. By 55 years, the equity exposure will come down to 10%.
Get more from Ulips
Insurance companies would now need to pay service tax only on fund management charges instead of the total bouquet of charges.
The benefit will obviously be passed on the customers. With the amount of charges coming down, now a larger part of your insurance plans, especially unit-linked insurance plans (Ulips), will be invested and could mean better returns.
Rajiv Jamkhedkar, CEO, Aegon Religare Life Insurance Co. Ltd, says: “It is a positive move since it will benefit the customers and the companies. In case where companies were absorbing this charge, they will now be relieved and in case where customers were taking the hit, they can expect a better yield.”
Service tax hits
Although Budget 2010 has kept the service tax rate at 10%, a closer look would dampen the initial euphoria.
Under-construction property: If your property is under construction and you pay your builder a part of the money before you get the completion certificate, you will have to pay a service tax on the payment.
Airline tickets: While earlier, you just needed to pay service tax if you were flying first class, now you would have to do so across all classes. This would be applicable on domestic as well as international flights.
Duty hike
You will now have to pay more for a car as well as the fuel on which it runs. Hike in duties has led to an immediate increase in the prices of car, petrol and diesel. Petrol is up by about Rs2.67 per litre and diesel by about Rs2.58 per litre.
The increase in the prices of cars is ranging between Rs3,000 for a small car and Rs50,000 for a big car. Consumer durables, such as television sets, refrigerators, air conditioners and washing machines are all set to become a tad more expensive as companies are contemplating passing on the excise duty hike to customers. Several companies have already revised their prices. For instance, LG Electronics India Pvt. Ltd will hike its prices by about 1.5-3.5%, beginning 15 March. Samsung India Electronics Ltd is still chalking out its new prices, while Godrej and Boyce Manufacturing Co. Ltd plans to go for a hike of about 2%. Whirlpool of India Ltd also increased prices by up to 2% from 1 March across product categories.
deepti.bh@livemint.com
Kayezad E. Adajania and Vijaya Rathore contributed to this story.
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First Published: Tue, Mar 02 2010. 10 29 PM IST