Reap budget gains, but await tax code
A financial plan is a long-term roadmap of effective management of finances available to achieve an individual’s financial goals and independence. However, the Union Budget mandates a review of our plans in the light of changes in taxation of various investments. Ranjeet S Mudholkar writes.india Updated: Mar 01, 2011 21:36 IST
A financial plan is a long-term roadmap of effective management of finances available to achieve an individual’s financial goals and independence. However, the Union Budget mandates a review of our plans in the light of changes in taxation of various investments.
This budget is a step towards the implementation of Direct Taxes Code (DTC) with effect from April 1, 2012. Therefore, it stayed away from making any major shift in the direct tax policies.
On the savings front, resident male individuals would enjoy the benefits of extra savings of R2,000 on account of enhancement in the basic exemption limit from R1.6 lakh to R1.8 lakh. The benefits for senior citizens may be higher on account of the eligibility age re-categorisation from 65 years to 60 years apart from raising the exemption limit from R2.4 lakh to R2.5 lakh. This entails a benefit of more than R9,000 for individuals in the age bracket of 60-65. Such benefits shall be more than R26,000 to very senior citizens (80 years and above), a category notified in this budget, who will now have an income up to R5 lakh exempt from income tax.
This Budget did not make any specific announcements by way of either change in the Section 80C (income tax law) limits, or the approved investment list. But there is an important change in the contribution to New Pension Scheme (NPS) by both the employer and the employee under Section 80CCD. Both the contributions earlier were considered as exempt under the limit of R1 lakh of Section 80CCE. However, this budget allows the employer contribution to the extent of 10% of the salary of the employee (including dearness allowance but excluding other allowances and perquisites) to be taken out of the R1 lakh limit for exemptions.
Such contributions shall also be allowed as deduction while calculation profits and gains by an amendment to Section 36 that are proposed to take effect from April 2012.
The budget also proposes tax-free infrastructure bonds worth R30,000 crore during 2011-12. This is a tax-efficient investment with high safety and steady income. However, as the DTC that proposes to withdraw the final exemption status from the long-term capital gains on equity and equity oriented schemes of mutual funds is still awaited, it calls for individuals to exercise prudence, and not just focus on tax benefits.
Investors are also advised to optimally exercise the additional deduction of R 20,000 for investment in long-term infrastructure bonds, in addition to a limit of R1,00,000 under Section 80C, which has been continued for the year 2011-12 too. To keep the portfolio allocation consistent, investors may also increase their exposure to equities, either directly or through SIPs (systematic investment plan) in mutual funds.
A lot would depend on the DTC guidelines, and prudent planning is required with suitable expertise where needed.
The writer is principal adviser and board member at the Financial Planning Standards Board India (FPSB India).