The expectations of people from the Union budget 2015-16 were a broad direction in the personal financial space so as to leave enough discretion as well as financial resources in the hands of individuals to manage their life goals. A rationalisation of existing limits was on the cards as they had not been revisited in several years and continued high inflation had put those limits out of sync with reality. Individuals had to put in place their own social security measures in the absence of state provisions in this regard. The usual expectations of further rationalisation in exemption limits were high in view of impending transition to Goods and Services Tax (GST), which would mean a unified higher indirect taxation initially, thus leaving fewer resources in the hands of individuals.
The measures outlined in the budget are set to achieve most of these through rationalisation, instead of further provisions of in-hand financial resources. The emphasis towards directing more funds towards health insurance and retirement by way of increase in Section 80D and 80CCD limits are a larger vision of empowering individuals to achieve these goals. The social angle was highlighted in the budget by suitable increases in exemption limits of 80U, 80DD, 80DDB. The measures towards streamlining investments of individuals are highlighted by way of announcements of tax-free infrastructure bonds and sovereign gold bonds. The abolition of wealth tax — which entailed low collection figures with high incidental costs — is also a welcome move.
It is worth considering that the service tax has been hiked from the prevailing 12.36% to a consolidated rate of 14%. This shall impact individuals across their discretionary as well as nondiscretionary spending. The review of financial planning therefore is necessitated especially with respect to discretionary spending in order to reduce the tax impact and direct such funds to schemes provisioned in the Budget such as NPS and tax free infrastructure bonds. In this perspective, I need to stick to the One-third Financial Planning principle, viz. no more than 1/3rd of the net income is to be spent, no more than 1/3rd of the net income is to be used for debt repayments, and at least 1/3rd of the net income is to be methodically invested to meet financial goals. The budget provides a clear direction for personal finance to be more aligned to goals of adequate health protection, efficient investing and retirement while at the same time cutting back on discretionary expenditure which involves service tax such as fine dining, telecom expenses, interest outgo on personal loans, processing charges, etc.
The writer is vice-chairman and CEO of Financial Planning Standards Board India. The views expressed here are personal.