Budget 2011: Some tinkering apart, little for investors

Budget 2011 holds very little for the common man except for a slight relaxation in tax slabs. The key announcements are as follows:

Senior citizens offered tax relief
In a move that affects all taxpayers uniformly, the basic exemption limit has been enhanced by `20,000 to Rs1.80 lakh, thereby effectively lowering the tax outgo for 2011-12 by Rs2,000.

The exemption limit for ladies has been kept constant at Rs1.90 lakh, whereas that for senior citizens has been marginally raised by `10,000 from the current Rs2.4 lakh to Rs2.5 lakh.

The age limit for qualifying as a senior citizen has been brought down to 60 years from 65 years now. In other words, a person who becomes 60 years of age anytime during the fiscal would qualify as a senior citizen from 2011-12.

Simultaneously, a new category —- that of very senior citizens —- has been introduced. Those persons who turn 80 years of age anytime during a financial year would qualify as ‘very senior citizens’. The basic exemption limit for such persons has been kept at Rs5 lakh. In other words, those 80 years and above would come into the tax net only if their income exceeds Rs5 lakh.

Salaried to be exempted from filing tax return
Currently, every person, if his total income during the previous year exceeds the maximum amount which is not chargeable to income-tax, is required to furnish a return of his income.

For salaried tax payers, the entire tax liability is discharged via the mechanism of TDS. Therefore, in cases where there is no other source of income, filing of a return is essentially a duplication of existing information.

To reduce the burden on the small tax payer, Budget 2011 proposes to exempt salary earners from filing their return of income. Note that for such exemption to apply, the person should not be earning any other income apart from salary. This will be rare because everyone, however small or big, would have at least bank interest as a source of income.

In any case, detailed rules and notifications in this regard are expected after which only the details of this proposal would be fully known.

Employer’s contribution to New Pension System (NPS) not under Rs1 lakh limit
Section 80CCD of the Income-Tax Act provides a deduction in respect of contributions made by an employee as well as an employer to the NPS account on behalf of the employee. Also, the aggregate deduction under sections 80C, 80CCC and 80CCD cannot exceed `1 lakh. The allowable deduction under section 80CCD includes contribution of employee and employer to NPS.

The budget proposes that the contribution made by the Centre or any other employer to a pension scheme under section 80CCD shall be excluded from the limit of Rs1 lakh.

Also, any contribution made by the employer to the account of an employee to the extent it does not exceed 10% of the salary of the employee in the previous year, shall be allowed as a tax deduction to the employer.

These amendments will benefit both employees and employers alike and further encourage participation in NPS of the service sector.

Dividend distribution tax (DDT) rate raised for firms and corporates
Currently, the DDT on dividends from non-equity funds stands at 12.5% for individuals and HUFs and 20% for others. The DDT on dividends from money market or liquid funds is 25% for all categories of investors.

Budget 2011 proposes to increase the above 20% rate to 30% to cut off any tax arbitrage between DDT and the basic tax rate.

Thankfully, there will be no change in the rate of DDT in the case of individual or HUF. Distribution of income by an equity-oriented fund shall continue to be exempt from tax.

Mutual funds (MFs) to open doors to foreign investors
Currently, apart from resident investors, only FIIs and sub-accounts registered with the Sebi and NRIs are allowed to invest in mutual fund schemes. Budget 2011 proposes to permit Sebi registered MFs to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. This move is meant to enable Indian MFs direct access to foreign investors and widen the class of foreign investors in Indian equity market.

However, this remains a budget announcement as of now —- the exact form and shape of this proposal is yet to be announced. Also, in the FM’s speech, only equity schemes were mentioned —- whether limiting foreign participation only to equity funds is a conscious decision or not will also be known only after the details come out.

All in all, this will be a significant positive for not only mutual funds in particular but the capital market in general and kudos must be extended to the FM and his team for the same.

Sec 80CCF deduction of Rs20,000 to continue next year
In my previous columns on bonds under Sec 80CCF, I had mentioned that this was a single year window for this deduction since there was no mention of the same in the New Direct Code that would be applicable from next year.

Now, the Budget has clarified that the 80CCF Rs20,000 deduction will be available next year also. Obviously necessary changes would need to be carried out in the Direct Taxes Code Bill.

To conclude
Clearly, the budget was a non-event for the average investors. There was absolutely no action taken regarding big-ticket items such as divestment, fuel policy, FDI, the high fiscal deficit, inflation management, etc. One can’t help but get the feeling that the tinkering and fixing exercise that the budget eventually turned into is a precursor to the new tax code. Watch this space for updates.

Sandeep Shanbhag is director, Wonderland Consultants