What 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. Here’s a lowdown.
THE SUM ASSURED
Budget 2012 has proposed to increase the sum assured limit as a multiple of the premium in order to enjoy tax sops.
Under section 80C of the Income-tax Act, premiums paid towards a life insurance policy qualify for a tax deduction up to R1 lakh. But if the amount of premium paid in a fiscal year is in excess of 20% of the sum assured, then tax deduction is allowed only on the premium amount up to 20% of the sum assured. Even according to section 10 (10D), benefit such as maturity proceed is tax-free only if the premium is up to 20% of the sum assured.
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.
“Tax savings should be more about the tenor of investment and not about the design,” said P Nandagopal, CEO, India First Life Insurance. “Reducing cover policies caters to people who accumulate enough assets over time and need very little insurance later. By having a minimum sum assured of 10 times the premium paid at all times, such policies will be affected.”
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 Rs 60,000 crore.
In 201112, infrastructure finance companies used tax-saving bonds to raise funds from small investors. These bonds offered a tax deduction on the amount invested up to R20,000 under section 80CCF. Along with R1 lakh deduction under 80C, this section bumped up your total deduction to Rs 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. Infrastructure finance companies will not have this avenue as an attractive option to raise money from small investors.
This will impact you if you earn less than R9 lakh per annum. If you are below 60 years of age and your income is around R7-9 lakh, you will have to pay Rs 2,060 more as income tax. For women below 60 years of age and in the same income bracket the loss is Rs 3,090. For senior citizens and very senior citizens, the loss is Rs 4,120 for the same income bracket. The maximum savings in your overall income tax is Rs 16,480 for men below 60 years of age and with income of Rs 11 lakh or above.
Ulips: Last year a 10.3% service tax was made applicable on all cost heads, including the policy allocation charge and administration charge. From the next fiscal this service will increase to 12.36%.
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 or motor insurance, the service tax is levied on the entire premium.
Mutual fund (MF) distributors are now exempt from paying service tax from the commissions they earn from selling MFs. Till now, distributors used to pay a service tax of 10.3% on the commission they received. Fund houses used to deduct this service tax on the distributor’s behalf. “This will result in a savings of at least Rs 2,000 per month for most distributors,” says K Ramesh Bhat, president,IFA Galaxy, an all-India association of independent financial agents.
Savings account 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. You will get a deduction of up to Rs 10,000 on interest earned from your savings accounts.
To earn Rs 10,000 in interest, you would need to keep at least R2.5 lakh in your bank account (if it earns 4% per annum) and Rs 1.7 lakh if you earn 6% per annum.
The Budget has extended the 1% interest subvention by another year for housing loans up to Rs 15 lakh, where the cost of the house does not exceed Rs 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.
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.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 October 1 this would apply to transfers if the consideration exceeds Rs 50 lakh for a property situated in an urban area and Rs 20 lakh if the property is situated in another area.