What the finance minister, Pranab Mukherjee, said in the Budget will definitely have an impact on your financial life. However, a lot of small things that remained unsaid will also leave a mark on your money and savings. We give you a list of seven such changes you can expect in your money life.

1. Insurancebecomes more about protection

Insurance so far has been less about protection and more about investment and tax saving. Budget 2012 has taken cognizance of this fact and has proposed to increase the sum assured limit as a multiple of the premium in order to enjoy tax benefits.

The Budget has proposed to reduce this 20% limit to 10%. So to get tax benefit under sections 80C and 10 (10D), you will have to buy a cover at least 10 times the annual premium. Currently, you need to buy only five times the annual premium to enjoy tax benefit.

If you are purchasing a term plan, this proposal may not affect you since the sum assured in a term plan is several multiples of the premium. But if you are buying an investment-cum-insurance policy such as unit-linked insurance plans (Ulip) or traditional plans, this proposal will be of importance.

In Ulips, if you are below 45 years of age, the minimum sum assured that you can take is 10 times the annual premium in a regular premium payment plan. So in this case, you shouldn’t worry. But if you are above 45 years of age or are buying a single-premium policy, ensure you buy a cover which is at least 10 times the premium.

Most traditional policies are structured to give you tax benefit. However, there are some that do not conform to the tax rules. The proposal has not only increased the protection element but also ensures that insurers are not able to dress sum assured as maturity benefit so that the policies enjoy tax breaks. The Finance Bill has defined the sum assured to mean the minimum amount assured under the policy when the insured event takes place at any time during the term of the policy.

Mint Money in February noticed policies that defined sum assured as the maturity benefit. In such cases, the maturity benefit or the sum assured was five times the premium paid. The death benefit—or the amount that goes to the beneficiary upon death of the policyholder—in such cases were the return of premiums at a specified rate.

Finance Bill 2012 has done away with this discrepancy; now the sum assured will mean the death benefit only.

Further, in order to ensure a minimum death benefit, the bill has proposed that the sum assured that qualifies for tax benefits—in other words it is at least 10 times the premium paid—will be the minimum death benefit that will be paid in any policy year.

In other words, if you pay a premium of, say, 1 lakh, the sum assured will have to be 10 lakh throughout the tenor. This is in order to check those policies that give a high level of sum assured in year one and subsequently bring down the death benefit.

Says P. Nandagopal, managing director and CEO, India First Life Insurance Co. Ltd: “Tax savings should be more about the tenor of investment and not about the design. Reducing cover policies caters to people who accumulate enough assets over time and need very little insurance later in their life. By having a minimum sum assured of 10 times the premium paid at all times, such policies will be affected."

2. From tax-saving to tax-free bonds

In his Budget speech, the finance minister repeatedly focused on the need for infrastructure development and funding in that sector. It seems the ministry is now focusing on the tax-free bond route to channel small savings into this sector since the minister was silent on tax-saving infrastructure bonds. Tax-free bonds, which offer a tax-free interest at the end of the tenor but no deduction at the time of investment, are issued by government entities such as NHAI and HUDCO. This Budget has proposed to double the amount for these bonds to 60,000 crore.

In FY12, infrastructure finance companies, including IDFC Ltd, L&T Finance Ltd and IFCI Ltd, used tax-saving bonds to raise funds from small investors. Introduced in budget 2009-10, these were a good savings tool for small investors as they offered a tax deduction on the amount invested up to 20,000 under section 80CCF. Along with 1 lakh deduction under 80C, this section bumped up your total deduction to 1.2 lakh.

The fact that any mention of this section was left out this time can result in investors not having this benefit for the coming financial year. It also means that infrastructure finance companies will not have this avenue as an attractive option to raise money from small investors. Whether this is going to be the case or not will be known through the course of the year as such a benefit can be introduced subsequent to the budget as well.

Sandeep Bhatnagar/Mint

Impact on you: The removal of this section will impact you if you earn less than 9 lakh per annum. If you are below 60 years of age and your income is around 7-9 lakh, you will have to pay 2,060 more as income tax. For women below 60 years of age and in the same income bracket the loss is 3,090. For senior citizens and very senior citizens, the loss is 4,120 for the same income bracket. The maximum savings in your overall income tax is 16,480 for men below 60 years of age and with income of 11 lakh or above (see graph).

3. Service tax net tightens on insurance plans

Ulips: Last year the budget brought all the cost heads under the service tax net. So instead of being applicable only on mortality and fund management costs, service tax was made applicable on all the cost heads, including the policy allocation charge and policy administration charge. The service tax available on these charges was 10.3%, including cess. From the next fiscal this service will increase to 12.36%. Says G.V. Nageswara Rao, managing director and CEO, IDBI Federal Life Insurance Co Ltd: “This increase in service tax will mean an increase in premium. It is unlikely that insurers will absorb this increase in service tax."

Traditional plans: These plans, which do not disclose costs, the composite rate of service tax has been increased from 1.545% to 3.09% (including cess). This rate is applicable only in the first year; for subsequent years, the rate of service tax has been kept at 1.5%. So you will pay 50% extra service tax for the same sum assured in the first year.

Term plans: Here, a service tax of 12.36% will be applicable on the entire premium since term plans only charges you for the insurance cover.

Non-life plans: In the case of non-life plans such as health insurance or motor insurance, the service tax is levied on the entire premium.

4. MF distribution costs out of service tax ambit

Mutual fund (MF) distributors have reason to rejoice. They are now exempt from paying service tax from the commissions they earn from selling MFs. A day after it presented the Budget, the government of India issued a notification consisting a list of items that will now be exempt from the service tax. Till now, distributors used to pay a service tax of 10.3% (including 3% education cess) on the commission they received. Fund houses used to deduct this service tax on the distributor’s behalf and pay it to the tax department.

At a time when distribution income appears to be on a decline on the back of regulatory restrictions as well as a drop in investor interest on account of lacklustre markets, distributors seem relieved by this measure as it will leave more money in their hands. “This is a great relief. It will result in a savings of at least 2,000 per month for most distributors. Even an ordinary distributor can save at least 1,000 every month by way of service tax exemption. If a distributor earns, say, 20,000, straightaway 2,060 used to get shaved off from his earnings. Now, he will get the entire 20,000," says K. Ramesh Bhat, president, IFA Galaxy, an all-India association of independent financial agents.

5. Savings account becomes tax friendly

The Union Budget has brought in a new section, 80TTA, which will enable you to keep small amounts of interest earned on your savings account out of the tax ambit.

According to the Budget proposal, you will get a deduction of up to 10,000 on interest earned from your savings accounts. Says Balwant Jain, charted accountant and CFO, Apnapaisa.com, “The finance minister proposes to grant a deduction in respect of interest on savings bank account to an individual and Hindu Undivided Family. The deduction is available in respect of interest on savings bank accounts earned by you from either a bank or a credit cooperative society or from a post office."

Impact on you: To earn 10,000 in interest, you would need to keep at least 2.5 lakh in your bank account (if it earns 4% per annum) and 1.66 lakh if you earn 6% per annum. Usually, people do not keep such lump sums in their savings account since other avenues such as bank fixed deposits fetch better returns.

Then there is a specific category that will benefit from this proposal: those with a taxable income below 5 lakh per annum. In the budget of 2011-12, salaried individuals earning income below 5 lakh were exempted from filing their returns; they were required to report the interest income from their bank accounts to their employers. Jain says, “A lot of salaried persons will be able to take the benefit of the scheme announced by the government where a salaried person is not required to file his income-tax return if his income is below 5 lakh and he has only income by way of interest on saving bank account not exceeding rupees 10,000."

6. Fillip to affordable housing

The Budget has extended the 1% interest subvention by another year for housing loans up to 15 lakh, where the cost of the house does not exceed 25 lakh. The measure will ensure credit flow at relatively cheaper interest rate to buyers in the low-income group.

The Budget has also allowed external commercial borrowings (ECBs) for low-cost affordable housing projects and reduced withholding tax on interest payments on ECBs from 20% to 5% for three years. ECBs are instruments used in to access foreign money by Indian firms by way of loans and credits. “This should help developers mobilize financing in an otherwise difficult financing climate," says Gaurav Karnik, tax partner (real estate practice), Ernst & Young, an audit and consulting firm. While this strengthens the hands of those developers looking at affordable housing in tier II and III cities, homebuyers in this segment will also benefit. Says Nandita Tripathi, director (tax and regulatory services), KPMG, “Extending 1% interest subvention by a year aims to boost affordable housing in the country."

7. Check on unaccounted money

To contain use of unaccounted money in real estate’s secondary market (where the properties being transacted in are not new), the government wants tax deduction at source (TDS). This may help smoother real estate deals and widen its scope.

The Budget has proposed to bring a new provision that every property buyer at the time of making payment by way of consideration for transfer of immovable property (other than agricultural land), will deduct a TDS of 1% of the agreed amount. Applicable from 1 October this would apply to transfers if the consideration exceeds 50 lakh for a property situated in an urban area and 20 lakh if the property is situated in another area. “A levy of TDS on immovable property transactions clearly intends to counter unaccounted money issues in the sector," says Tripathi.

At present, a TDS is applicable only when a non-resident Indian transfers immovable property.

Also See | Change in tax Liability (PDF)

deepti.bh@livemint.com

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