Juzer GabajiwalaVentura Securities
Finance Minister Arun Jaitley's maiden budget was devoid of any block buster announcements, and rightly so. However, there were a few surprises for retail investors.Positive Surprises1) Personal income-tax exemption limits raised from Rs. 2 lacs to Rs. 2.50 lacs for individuals and from Rs. 2.50 lacs to Rs. 3 lacs for senior citizens (60 years and above). This delivers a saving of Rs. 5,150 (including education cess of 3%) to all individuals across the board.2) Income-tax deduction for interest on housing loans for self-occupied property increased from Rs. 1.50 lacs to Rs. 2 lacs.3) Investment limit for the deduction under Section 80C of the Income-Tax Act, 1961 raised from Rs 1 lac to Rs 1.5 lacs. This will result in a maximum saving of Rs. 15,450 to investors in the 30% tax bracket. In addition to the Income tax changes, the retail investor could also gain from the divestment of PSU banks, as the FM has proposed to come out with IPOs for the benefit of retail investors. Negative SurprisesThe Union Budget has increased the period of holding for debt funds from the existing 12 months to 36 months, in order to classify the fund as long-term. Moreover, the rate of tax on debt funds will be at 20% (with indexation) and the previous concessional rate of 10% has been scrapped. This, according to the FM, has been done predominantly to remove the tax arbitrage between debt funds and fixed deposits. Secondly, Dividend Distribution Tax (DDT) was earlier calculated on the net dividend distributed; now it will be calculated on the gross dividend. The earlier effective DDT, which was 22.07% will now be 28.325% (including surcharge and cess). This 6.3% increase in the tax will have a direct impact on the returns of debt funds. Debt funds to lose their charmRetail investors who looked towards debt funds for tax-efficient returns will now have to pay more taxes. Fixed Maturity Plans (FMPs) with tenures of less than 3 years will become scarce as no investor would look at those instruments, going forward.Given below is the table depicting the change in taxation of debt funds:
Holding period | Existing Tax rate | Proposed Tax rate |
Less than 1 year | Marginal rate applicable to investor | No change |
More than 1 year but less than 3 years | 10% without indexation or 20% with indexation, whichever is lower | Marginal rate applicable to investor |
More than 3 years | 10% without indexation or 20% with indexation, whichever is lower | 20% with indexation |
Marginal Tax Rate | REQUIRE Regular Income (Dividend Option) | DO NOT REQUIRE Regular Income (Growth Option) | ||
Long Term | Short Term | Long Term | Short Term | |
More than 3 years | Less than 3 years | More than 3 years | Less than 3 years | |
30% | Indifferent between Fixed Income (Bonds/NCDs/FDs) & Debt Funds | Debt Funds would be still attractive | Indifferent between Fixed Income & Debt Funds | |
20% | Fixed Income is a better option | |||
10% |
A major conundrum will be for investors who have already invested in FMPs with a 1 year tenure in the year 2013-14 with maturity in 2014-15. They will be severely hit if the budget proposal is implemented with effect from this financial year as suddenly the returns would be taxed as short term capital gains and become liable to tax at their marginal rate.
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