BackBudget 2014: It takes a tax break to make the middle class smile
A return to the FRBM target of 3% fiscal deficit and zero revenue deficit by 2016 will reduce the need for cheap household money
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As a tax payer you’ve gained a bit this budget. If you are under 60 years of age, the first ₹ 2.5 lakh of income is now tax exempt. If between 60 and 80, ₹ 3 lakh is tax exempt and for those over 80, your first ₹ 5 lakh continues to be tax exempt. The surcharge on the ₹ 1 crore-plus income earners remains as do the tax slabs, cess and surcharge. The section 80C limit is now up by ₹ 50,000 to ₹ 1.5 lakh, and you can now invest up to ₹ 1.5 lakh a year in Public Provident Fund (PPF), up from ₹ 1 lakh. Your home loans just got sweeter with another ₹ 50,000 deduction allowed on the interest, which takes the deductible amount to ₹ 2 lakh. If you earn more than ₹ 10 lakh a year, you are richer by just over ₹ 35,000 a year due to these changes.
As an investor, you have won some and lost some. Non-equity mutual fund investors lose since the long-term capital gains tax is doubled to 20% and the definition of long-term is now 36 months instead of 12 months. This is a clear bank lobby win. Equity investors should get ready for big bang PSU bank disinvestments because the finance minister (FM) has announced the sale of shares to retail investors to get the ₹ 2.4 trillion needed by banks to meet the Basel III norms. The government’s first attempt on PSU stock sale through the exchange-traded fund (ETF) route has done well—we should expect more such PSU ETFs. Real estate investment trusts will get a new lease of life, and we should expect a gradual clean up of the black money sump called real estate in India. Small savings will get a boost said the FM and resuscitated the Kisan Vikas Patra (KVP), which was withdrawn in 2011. At 8.4% interest where money doubles in eight years and seven months, the KVP allows cash investments.
Five other things to note. One, insurance (and by default pension) foreign direct investment (FDI) has been hiked to 49%. Two, a committee will now decide how to use the unclaimed money lying in PPF and other small saving schemes to benefit senior citizens. We await the report by December.
Three, a unified know-your-customer (KYC) process with inter-usability and a common demat will be reality soon. This means that one number (why can’t it be the UID?) will allow you to look at one site, which has all your demat accounts, mutual funds, stocks, and insurance policies in one place. Four, the FM has put his weight behind differentiated banks and payment banks—so good news for inclusion. On-tap bank licences will be a reality too. Expect competition to push up the sticky savings deposit rates.
Consumers of financial products and services must cheer because the FM has articulated his commitment to the Indian Financial Code (IFC) becoming law. Remember, the IFC puts consumers at the heart of financial sector regulation and moves India to a seller-beware market. Regulators will do well to download the handbook from the finance ministry’s site and think of implementation.
But I see a contradiction in what he said about getting retail investors into markets and the desire to grab more cheap household money. Sops to insurance, boost to banking and small saving instruments, the killing of debt funds and exhuming KVP look suspiciously like an attempt to get hold of household money. Remember, banks and insurers hold more than ₹ 20 trillion of central government securities due to rules that mandate this investment. This money earns negative returns for households and allows the government cheap spending money. I’m hoping that a return to the Fiscal Responsibility and Budget Management (FRBM) target of 3% fiscal deficit and zero revenue deficit by 2016 will reduce this need for cheap household money.
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