While the hype around the Budget as always is very high and news channels and newspapers are flooded with debates and opinions, the only thing that matters to people is the impact the Budget has on personal finance. What actually matters to most people are the income tax slabs and how the prices of their day to day commodities have been impacted. The Union Budget 2018, didn’t address the Urban Indian in detail, and instead focused on rural and infrastructure development.
However, there were some changes that impacted the personal finance of the average Indian. To make things more clear below are the extracted relevant points with respect for the same to understand the true impact on every individual.
Income Tax
1. The tax rate of 25% has been extended to companies with a turnover of up to Rs 250 crore as against the previously set bar of Rs 50 crore. This change will cover almost all small and medium businesses. Additionally, such a large coverage will boost the overall economy. The impact is positive and has come across as a relief for MSME’s account for 99% of the corporate tax filers.
2. The cess on income tax has been hiked to 4% from the current 3%. This modification will result in an increase in the net tax payable, for all categories of taxpayers, to some extent. The impact shall be negative since the tax liability for highest tax bracket (assuming Rs 15 lakh income) goes up by Rs 2,625. For the middle-income taxpayers (between Rs 5 lakh and Rs 10 lakh), tax liability increases by Rs 1,125, and for the lowest bracket (Rs 2.5 lakh to Rs 5 lakh) by Rs 125.
2. No changes have been made in income tax slab rate for individuals. However, a standard deduction of Rs 40,000 for salaried employees has been reintroduced. The benefits of transport allowance of Rs 19,200 and medical reimbursement of Rs 15,000 are being withdrawn. The net benefit to salaried class is only Rs 5,800. However, individuals with a higher income tax slab rate will end up paying more tax due to the hike in cess rate. The impact of the change is neither very positive nor negative.
3. For senior citizens, the Section 80D limit currently set at Rs 30,000 is proposed to be hiked to Rs 50,000. This change will encourage senior citizens to have the essential healthcare they need. The impact of this shall be positive since a life with dignity is a right of every individual in general, more so for senior citizens.
Capital Gains Tax
1. For equity, LTCG tax of 10% has been introduced for capital gains of over Rs 1 lakh, arising after January 31. For example, an investment of Rs 100 in January 2017 is valued at Rs 120 on January 31, 2018. Now, if the value grows to Rs 130 in July 2018 and is subsequently redeemed, the tax will be on the incremental gain after January 31 i.e. on Rs 10 (Rs 130 to Rs 120). Although negative to some extent, equity does have potential to outperform all other asset classes in the long run.
1. DDT on Equity MF to be 10%. Avoid looking for dividend income from equity investments and give it time to grow in the long run for compounding benefit. However, it will have an impact on returns from arbitrage funds (recommended as an alternative to liquid funds), where the investment was done with dividend option, as DDT was nil until now. The impact of the same shall be neutral.
2. An Increased time horizon in Section 54 EC Capital Gains Bond to five years. With a lowered interest rate of 3.67%, post-tax (for the highest slab), there is no incentive to lock in for five years. Also, after five years, one is exposed to reinvestment risk. Additionally, benefits are available only in case of land and building, and not in the case of plants, machinery, bonds, unlisted shares etc.
Since the budget entails technical terms it can come across as difficult to understand. However, the above article helps decipher relevant points within the budget that are most relevant to individuals from a personal finance standpoint.
The writer is CFA, founder & chief happiness officer, HappynessFactory.in.
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