If you are one of the millions of Indians who invest their savings primarily to save tax, your life has changed. Forever. The key message coming out of finance minister Pranab Mukherjee’s Budget is: Days of tax exemptions are over, start doing your own financial planning. And that’s not all. If you have been averse to equities, it’s time you started steeling your heart to put aside some part of your savings in equity—directly, or better still through mutual funds or unit-linked insurance plans (Ulips).
Vivek Law, National editor, CNBC TV-18
This is why. He has, perhaps for the first time by a finance minister in recent years, left exemptions on investments untouched. Moreover, he has stated explicitly his resolve to move to an era of no exemptions, but lower tax rates. This means:?I?will give you more money to keep but you decide now how to invest it. For starters, this year people earning exceeding Rs10 lakh get to keep 3% of the tax paid, through the removal of a 10% surcharge. For the rest, the tax slabs have been hiked, but almost negligibly, giving a benefit of Rs1,000-3,000. And yes, fringe benefit tax has been abolished (though there remains confusion on the extent of it), so you get to pay less tax, as many perks and allowances will no longer be taxed.
So, while one hopes Mukherjee will lower tax rates next year, for now it’s time to focus on enhancing returns on investment. He has left rates of interest on small savings untouched,?and?given?no further exemptions under section 80C, which in any case, meant little as it clubbed your child’s education?fees,?your home loan principal repayment,?provident fund deducted by your employer and all other investments you made in equity-linked savings scheme, small savings, Ulips, etc.,?within?the Rs1?lakh basket.?Except for public provident fund, where the returns you earn on maturity are tax-free, all other “safe” investments tax your returns. In contrast, equity—direct and through mutual fund and Ulip—earns you tax-free income if you remain invested for a year. Yes, he has kept long capital gains tax exemptions intact.
The primary aim of investing is to see your wealth grow. And now that there is unlikely to be any further incentive in the form of tax benefits up front when you invest your money, your focus has to shift to ensure that as much of the wealth you have built over the years, comes back to you rather than going into the government’s coffers. In other words, the focus of your financial plan has to shift to building wealth and not saving tax.
Of course, you have to invest in equity only to the extent of your risk appetite. And do so keeping a long-term view. But do so, you must. That is the underlying message of Budget 2009-10 for your wallet.
Vivek Law is national editor, CNBC TV18. Respond to this column at email@example.com