The large majority of savers and investors who watched on expectantly as Finance Minister Arun Jaitley unveiled the Union Budget 2017 on Wednesday (February 01) would have walked away a tad disappointed. It turned out to be a damp squib for personal finance.
The short-term pain inflicted by demonetisation had, in part, led many experts to believe that the budget would dole out goodies to investors and savers in terms of additional tax breaks. To their surprise and angst, almost none were forthcoming.
Overall, there were two incremental benefits added on the personal finance front – the reduction in tax rates for the Rs 2.5 to Rs 5 lakh slab from 10 per cent to 5 per cent, and the downward adjustment in what constitutes ‘long -term’ from a capital gains standpoint for real estate. In addition, it was announced that going forward, exemptions for affordable housing would be recognized based on carpet area of 30 square metres (for metros) and 60 square metres (for non-metros), rather than saleable area. This would indirectly serve to increase the number of projects qualifying under the category.
Rebates (applicable to those earning less than Rs 5 lakh per annum) have been reduced from Rs 5,000 to Rs 2,500 for those earning up to Rs 3.5 lakhs per annum. Effectively, an individual earning 3 lakh per annum now must pay no tax, as the rebate of Rs. 2,500 would offset the 5 per cent income tax applicable on their taxable income of Rs 50,000. For those earning more than Rs 5 lakh per annum, this would lead to a uniform saving of Rs 12,500 per annum.
Those earning between Rs 50 lakhs and Rs 1 crore per annum were dealt a body blow, with a new surcharge of 10 per cent being slapped on their incomes from the following fiscal. This effectively increases their tax outgo by Rs 1.18 lakhs (on a Rs 50 lakh income) to Rs 2.68 lakhs per annum (on a Rs 1 crore income). Ostensibly, this move will make up for the estimated Rs. 15,000 crore loss to the exchequer on account of the revision of the tax rate applicable on the first bracket. The move is largely in line with the pre-budget expectation of “wealth distribution”.
By capping cash payments for any purpose to Rs. 3 lakhs, the FM reiterated the current government’s push on curbing black money within the economy. No specific incentives for digital payments were announced, against widespread expectation.
On Insurance, the budget failed to deliver anything concrete. Experts had anticipated some form of tax relief on annuity incomes (which are currently fully taxable), as well as an increase in 80D limits to encourage people to buy more medical insurance. At 0.7 per cent of GDP, India remains vastly underpenetrated on the general insurance front; with rising medical costs, lifestyle diseases and instances of road accidents, this is an area of much concern. No clarity on the GST applicable to insurance premiums was forthcoming – this presumably means that the tax rate applicable to term and health insurance (or the ‘risk’ element of other forms of insurance) would be between 18 per cent and 24 per cent - a discouragingly high rate. Expectations for a revised limit for 80C deductions were quashed too.
In addition, the much expected and anticipated revisions on NPS clauses failed to come through. Currently, only 40 per cent of NPS withdrawals are tax-free. Another 40 per cent needs to be mandatorily used to purchase a low-yielding annuity, which works to the detriment of retirees. No clarity on Tier-II withdrawals were forthcoming either.
The capital markets heaved a sigh of relief as no changes were made to the definition of ‘long-term’ for computing capital gains from equities. It was widely expected that the definition would be changed from 1 year to 3 years. As expected, the NIFTY buoyantly rallied past the 8,700 mark as short sellers rushed in to frantically cover their positions.
For mutual funds, the budget was neutral. Barring the marginal increase in disposable incomes by Rs. 1,000 per month, no other positives emerged. It remains to be seen whether the industry can capture this opportunity smartly to increase its overall SIP (Systematic Investment Plan) book or not. Additionally, given that the marginal propensity to consume is highest in low to moderate income brackets, it’s likely that the bulk of excess savings generated thus, will actually flow towards consumption rather than savings. The increased thrust towards infrastructure (at Rs 3.96 lakh crores) might benefit thematic infrastructure funds in the long term.
On the personal finance front, more was expected from the perspective of real estate. While ‘infrastructure’ status being granted to affordable housing will certainly reduce their cost of capital and stimulate production activity, it will not solve the demand side problem. Coupling this move with additional incentives for first time home buyers and an increased Section 24 limit for deducting home loan interest (this currently stands at an insignificant Rs. 2 lakhs) would have helped address the dual problem of oversupply and muted demand from both sides.
Presumably, the FM is of the view that a benign interest rate regime and a return of buyer confidence, would combinedly suffice to stimulate demand for affordable homes from the middle-income group.
For the time being, the impact of the reduction in holding period for gains to qualify as ‘long-term’ remains a moot point too. After all, a large percentage of real estate buyers who purchased homes in the past two years would not be sitting on any significant profits to go out and book. However, this move could stimulate secondary market activity eventually.
Overall, this was a balanced budget with no terrible negative surprises and with a clear focus on agri, rural and infrastructure. Unfortunately, there was precious little in yesterday’s budget to buoy one’s personal finances and drive investor behaviour in the right direction.
