Wealthy Wednesdays: Budget 2015 decoded for Tax Payers and Investors

No tax relief to beat inflation
There are three kinds of relief that can help individuals beat inflation and are most important: change in tax rates, tax slabs and the 80C deduction that allows certain investment and expenditure to be tax-exempt. The budget hasn't touched any of these. Another thing that could have also helped would have been an increase in deduction on interest on housing loan (currently Rs. 2Lakh), which is also on the lower side  Even if one were to capitalise with a factor of 10%, a rough back-of-the envelope calculaton suggests that it will only cove a loan amount of Rs. 20-Rs. 25 lakh. That’s too little considering the increase in property prices.

Increase in service tax to increase burden on common man
Budget 2015 has increased the service tax (ST) rate from 12.36% to 14%. However, the story does not end here. The government has given itself room to raise the ST rate even further to 16%. An enabling provision has been put into place that empowers the government to impose a Swachh Bharat Cess on all or any of the taxable services at a rate of 2% of the value of such taxable services, the objective being apparently to finance and promote Swachh Bharat initiatives. This Cess shall be levied from a later date yet to be notified by the government
Service tax, though an indirect tax, directly adds to our cost of living. Expenses on almost all amenities such as telephones, electricity, restaurants, transport, credit cards etc. As this service tax is passed on by the service provider, in effect, it is the common man, irrespective of his income, who bears it.

HNIs to benefit from Wealth Tax abolition
This amendment essentially affects only the high networth individuals (HNIs). Currently, wealth-tax is levied on an individual or HUF or company, if the net wealth of such person exceeds Rs.30 lakh. However, since the actual collection from this levy (in the larger scheme of things) was around a nominal Rs. 800 crores but with a significant compliance burden on taxpayers as well as administrative burden on the tax department, the means didn’t seem to justify the end. Hence, it has been decided to do away with Wealth Tax altogether.

Instead, any person having a total income of over Rs. 1 crore will now pay a surcharge of 12% instead of the earlier 10%. Note that this surcharge is only applicable for taxpayers earning a total income of over a crore – others are exempted from surcharge altogether.

However, those who are subject to this higher surcharge should note that it’s not just 2% - since the education cess of 1% and the higher education cess of 1% are levied over and above the surcharge, the effective tax rate increase by more than 2%. Here’s how. Currently, the effective tax rate is 30% +10% surcharge =33% +3% cess = 33.99%. This equation now stands modified to 30% + 12% surcharge = 33.6% +3% cess = 34.61%. So basically persons whose total income is above a crore will now be paying tax @34.61%.

TDS on Recurring Deposit interest
Currently, only the interest on fixed deposits (FDs) is subject to TDS, interest on recurring deposits (RD) is exempted from tax deduction at source. However, w.e.f June 1, 2015, interest on RDs above Rs. 10,000 will be subject to a 10% TDS.

More relief for persons with disability and severe disability
Sec. 80DD and Sec. 80U provide tax deduction on expenses incurred for training and rehabilitation due to severe disability. 80DD is for expenses incurred on a disabled dependant whereas 80U is for expenses incurred on self due to disability. The current limits are Rs. 50,000 for disability and Rs. 1 lakh for severe disability.

In view of the rising cost of medical care and special needs of a disabled person, Budget 2015 proposes to raise these limits to Rs. 75,000 and Rs. 1,25,000 respectively. This amendment will apply from 1st April 2015.

Limited benefits w.r.t. health expenses
While the limit of deduction on health insurance premium has increased from Rs 15,000 to Rs 20,000, it would have helped more, if there was instead an increase in reimbursement of medical expenses. Insurance is only helpful when you're hospitalised, but after the age of 35, most individuals start incurring day to day medical expenses due to lifestyle related and other chronic ailments. So the exemption on reimbursement of medical expenses, which at present is only Rs. 15000, could have been increased to Rs. 25000 or more in the very least.

Health insurance premium for senior citizens has increased from Rs 20,000 to Rs 30,000, and for those above 80 years (not covered by health insurance) deduction of Rs 30,000 towards expenditure on medical treatment will be allowed.

Optional EPF for low-income persons, a thoughtful move
With respect to Employees Provident Fund (EPF), the Finance Minister has said that the employee may opt for EPF or the New Pension Scheme (NPS). I don't think it should be an either-or option – both schemes should be open to the employee.Typically the bias should be towards EPF as it gives you fixed returns of about 8.5% p.a. (rate will change from year to year), whereas NPS rates vary as per the market. While in theory the returns may average out over the years in NPS as well, one also has to take into consideration possibilities like a long period of recession etc.

Moreover, the Finance Minister has specified that for employees below a certain threshold of monthly income, contribution to EPF should be optional, without affecting or reducing the employer’s contribution. This would be a welcome and thoughtful move, so that while there would be a certain amount of fixed saving due to the employer's contribution, those in the lower income category will be benefit  due to the additional disposable income this provides.

Boost to contributions in pension plans and schemes to largely benefits the youth
Readers must be aware that the Sec. 80C limit had been raised from Rs. 1 lakh to Rs. 1.50 lakh with effect from 1st April, 2014. However while doing this, the limits under two related sections–Sec. 80CCC dealing with contributions to pension plans and Sec. 80CCD dealing with investments including NPS–remained unchanged at Rs. 1 lakh. Budget 2015 seeks to correct this anomaly by raising the total limit of these sections to Rs. 1.50 lakh. Also an additional deduction is proposed in respect of any amount paid, of up to Rs. 50,000 for contributions made by any individual under the NPS.
 
While this amendment will apply from 1st April 2015, it will mostly benefit the younger demographic, who is yet in the accumulation phase of financial planning, as it affects contributions made now for future pensions. It doesn't change anything w.r.t annuities or pensions, which remain fully taxable and hence will not benefit those who are  already receiving annuities / pensions from these products. A reasonable deduction for pensions received would have perhaps been a more effective tax relief measure.

Success of Gold Monetisation and Tax Free Bonds to depend on various factors
While gold monetisation is a good move that will curb the parallel market of gold in India, import duties on this precious metal should have been lowered. Gold monetization may seem good in theory–its a great way of making a hitherto non-productive asset, productive for the economy, but the key will be in the implementation. A lot of gold is undeclared and a majority of Indians stock gold in the form of jewellery rather than in the form of coins or bars. Will people be willing to demat their jewellery, like they do shares? How people take to this scheme will also depend majorly also on how the scheme is formulated.

A similar scheme was launched in 1998, but didn’t find many takers as the minmum ticket size was 500 grams of gold. As per news reports, it has just managed to mop up around 18-20 tonnes of gold.  Gold holdings with Indian households, on the other hand, are estimated to be in the region of around 22,000 tonnes. So the new shceme if framed well (in terms of minimum amount, interest rate, liquiditiy etc.) can garner deposits multiple times more than its predecessor.

Tax free infrastructure bonds essentially cater to those in high income brackets and senior citizens. While it is a welcome instrument, once again the success will depend on the framework in terms of liquidity, interest rate, and various other finer aspects.