Five Ways Union Budget 2017 May Impact Your Personal Finances

It’s been a torrid couple of post-demonetisation months for the lay investor. The snaking ATM queues, zigzagging markets, the sudden rise - and equally sudden fall in debt fund returns and the precipitous drop in deposit rates, all contributed to the melee that will surely stay etched in our memories for a long time to come.

Investors are now keenly awaiting the Union Budget 2017, unseasonably scheduled this year on February 1, to get more clarity on the road ahead with respect to their personal finances. While these are mostly speculative yet, here are some likely outcomes of the Union Budget 2017 that could influence your personal finances in the next fiscal.

Changes in the way equity profits are taxed
Last month, Prime Minister Narendra Modi indicated that the quantum of tax being paid by those profiting from the securities markets is low, sparking off speculation that a budget-led change in the way profits from equities and equity oriented mutual funds are taxed is imminent. The Finance Minister hastily clarified that the government has no intent to tax long term capital gains from equities.

However, there’s a good chance that there’ll be a significant change to what exactly constitutes “long-term” in the context of long-term capital gains from equities. We’ll likely see the floor holding period increase from the current one-year to at least two, or perhaps even three years. Besides this, there’s a good chance that the current rate of short-term capital gains tax will be increased from 15 per cent to 20 per cent or thereabouts. Whether equity dividends will continue to be tax-free or not, remains to be seen too.

These tax moves may actually act as quasi-filters for “hot moneys” that are ideally not geared for equity investing. AMFI (Association of Mutual Funds in India) data indicates that 37 per cent of equity mutual fund investments get liquidated within a year, and as much as 60 per cent within two years. Considering that investing into equities with a time horizon of anything under five years is fraught with danger, these statistics are quite alarming. To that effect, the budget-led tax changes may act as a nudge in the right direction.

More tax breaks on home loans
The already beleaguered Indian real estate sector, reeling under the pressure of excessive inventory and muted demand, was dealt another body blow in November in the form of demonetization.

A Knight Frank study has indicated that there’s been a further 44 per cent fall in demand for real estate post the controversial November 8 announcement; resulting in a colossal drop of Rs 22,600 crore in revenues for the sector.

The Centre has made its intentions apparent by pressuring banks to reduce rates on home loans recently. In a bid to lend a fillip to the flagging realty market, there’s a possibility that the Government will hike the tax benefit on the interest paid on your home loan from the current ceiling of Rs 2 lakh. Section 24 of the IT act allows you to deduct up to 2 lakh of loan interest per year for a self-occupied property. This may go up significantly in this budget; some even expect it to be raised by two and a half times to 5 lakh.

Coupled with the fall in home loan rates, this move may, over a period of time, resurrect demand within the real estate sector; provided a grip is acquired on the problem of soaring inventory levels. Noteworthy price appreciation, though, might still be a couple of years out.

An increased 80D limit
We live in an age where an unfortunate medical emergency can topple a financial plan like a house of cards; a Nation-wide NSSO (National Sample Survey Office) health survey has inferred that hospitalization costs grew at 10.7 per cent per annum in urban India and 10.1 per cent in rural India, between 2004 and 2014. That’s a perturbingly high escalation rate.

Add to that the dismally low penetration (0.7 per cent of GDP) of non-life insurance in India, and we have a potential calamity in the making. Even within the non-life space, Health Insurance commands just 27.7 per cent of the share of premiums, per a recent IBEF report.

In light of the above, the Government is likely to increase the present ceiling of Rs 25,000 (Rs 30,000 for Senior Citizens) for deducting medical insurance premiums from incomes, in this budget. The move may encourage families to seek out adequate medical coverage, which will stand them in good stead in the long term. An increase in the 80D limit to Rs 40,000 or more is on the cards; anything above that may prove to be by and large nugatory in nature.

Clarity on the GST applicable on insurance premiums
Currently, the service tax rate on Life Insurance premiums ranges from 1.5 per cent for single premium policies to 15 per cent on term and health insurance premiums. The first-year premiums for endowment plans attract a service tax rate of 3.75 per cent. GST, once implemented, could lead to a uniform tax rate on all types of insurance – this figure is estimated to be between 15 and 18 per cent.

It has been pointed out that taxing insurance premiums at such high rates could prove detrimental not just to the industry, but to the general Indian populace; which is already by and large under-insured on both the life and health fronts.

Term and Health Insurance do not constitute an investment, and are in effect pure risk coverage. These are basic financial planning requirements for any individual, and hence clearing the path for their widespread proliferation will be broadly beneficial for the nation as a whole. Keeping this in mind, it’s likely that the Government will reduce the GST rate applicable to insurance policies that serve the purpose of providing pure risk coverage to investors.

Clarity on NPS Tier – II taxation, and simplification of RGESS
As of December 31, 2016, the total assets across NPS Tier-I accounts amounted to a mere Rs 5,130 crore. For Tier-II accounts, the number is an even more ludicrous Rs 279 Crore – despite their debt funds actually performing much better than traditional savings products! One of the issues that keep investors away from the more liquid NPS Tier-II accounts, (that do not provide the tax breaks, but act more like regular mutual funds) is the opacity regarding the tax treatment on profits earned from them. The current budget is expected to lend clarity on this matter.

Besides the clarity on Tier-II account taxation, there’s a likelihood that budget will take a re-look at the tax efficiency of the presently E-E-T Tier-I accounts. At present, 40 per cent of the NPS Tier-I corpus can be withdrawn tax-free, whereas the remainder is subject to tax. There could be amendments to the structure in the budget, perhaps allowing for a larger portion of the Tier-I corpus to be withdrawn tax-free.

Asides of the NPS, another Government led equity saving initiative that begs re-visitation is the RGESS (Rajiv Gandhi Equity Savings Scheme) that allows for an additional deduction of up to Rs. 25,000 from one’s taxable income under Section 80CCG.

The present eligibility criteria are complex enough to scare off the lay investor; the scheme also ends up excluding a large segment of the investing populace which has either invested into equities before, or has an income exceeding Rs 12 lakhs per annum. The current budget could amend RGESS provisions to allow a larger cross section of investors into the fold.