How much does the Budget give in your wallet?

LESS TAXING: A panel of experts demystifies what Budget 2008 means to your wallet and your money.

      

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Union Finance Minister P Chidambaram on Friday put more money in your wallet through income tax benefits, but at the same time he nudged citizens to invest in equity for the long term by hiking the short-term capital gains tax while leaving all tax exemptions under 80C untouched.

What are the implications of these new tax laws on your personal finance?

A panel of experts comprising income-tax expert Subhash Lakhotia, MD and CEO of ICICI Prudential Life Insurance Shikha Sharma and HDFC Mutual Fund MD Milind Barve demystified what Budget 2008 means to your wallet and your money on CNN-IBN's special show Budget and Personal Finance.

The show was moderated by CNBC TV18's Senior Editor-Anchor Vivek Law. Here is how the experts answered some of the questions that the common tax-payer is asking after this Budget.

More money in your hands thanks to the higher tax slabs. But what is the actual benefit for the tax-payer?

Subhash Lakhotia: First of all, it's a happy news for all sections of tax-payers. Be it individual tax-payers, women tax-payers or senior citizens, this will mean big tax saving for all. This is the first time in the history of Budgeting in India that we have seen a provision where in one Finance Bill itself, the exemption limits have been raised in such a large scale and tax slabs restructured.

This will reduce the incidence of income tax for all categories of individual tax-payers. In case of an individual tax-payer, the minimum tax saving will be to the tune of Rs 4,120 (i.e for income between Rs 1.5 - 3 lakh). If the income is Rs 5 lakh and above, the saving will be as high as Rs 45,320, inclusive of education cess.

For women tax-payers, the minimum tax saving will now be Rs 6,695. If she has an income above Rs 5 lakh, the income tax saving will be Rs 44,800. As for senior citizens, the minimum tax saving will be Rs 6,180 while in case of income of Rs 5 lakh and above, the tax saving will be 48,000.

What are the benefits under Section 80D, which is for health insurance. Earlier 80D used to have a limit of Rs 15,000. But now the Budget has a provision under which if one buys a health insurance policy for parents, he/she can claim tax benefit on the same. And if the parents happen to be senior citizens, the limit is up to Rs 20,000.

Subhash Lakhotia: Under the existing provision, you can claim benefit for up to Rs 15,000 for health insurance policies for spouse, children and parents. If the parents happen to be senior citizens, the limit goes up to Rs 20,000.

But under the new law, the Rs 15,000 limit is now for spouse and children while there is a new provision for an additional Rs 15,000 for parents, which add up to a total of Rs 30,000. If the parents are senior citizens, then the additional benefit on parents can go up to Rs 20,000, which add up to Rs 35,000. This amount is going to be a straight deduction from the annual income.

Now, if this is added to the provisions under the new tax slabs, the minimum amount of extra saving on the tax front goes up to Rs 10,000 along with deductions under Section 80D.

Moreover, this Budget has removed a special condition. Earlier the law was that for one to claim tax benefit under Sec 80D, the parents have to be dependent on the tax-payer. Now, they don't have to be dependent and they may have separate incomes and both sides can claim separate deductions as well.

Does this mean good news for health news insurance companies? Will more people now make health insurance a part of their financial planning?

Shikha Sharma: This is indeed a good news for the tax-payers as well as for the health insurance sector now that Budget incentivises people to buy health insurance. But if one looks at the products available in the market today, there are very few products which will cost that much.

Also, there are very few products in the market targeted towards senior citizens. This Budget announcement will now spur a lot more thinking on the part of health insurers to come up with products which are appropriate for senior citizens, which provide more comprehensive coverage and, therefore, likely to be more expensive.

Does it now make a lot of sense to buy a health insurance for your parents even though the premiums are higher as it allows you to take back that much money through tax benefit?

Shikha Sharma: Absolutely. The logic for this is if you look at the cost of a health insurance plan for a 30-year-old vis-à-vis a 60-year-old, the difference in cost is about 3 to 3.5 times. So, there is a very strong logic that the deductions for the health insurance premium for a senior citizen should be much high than it is for a younger person.

The other thought that went behind this is that as the whole industry is developing, if people are not being able to buy health insurance for senior citizens, that is because they simply may not afford the high cost. So, we now have two engines to finance it — the senior citizen himself plus the children who may have some more disposable income in their hands.

From the policy point of view, it's a good move. As regards the readiness of the industry, we don't have the full range of products today. But I am sure over the next year, we will see companies coming up with some good products.

Health insurance apart, there is a very strong thrust on senior citizens in this Budget. But the premiums for the senior citizens have always been on the higher side for logical reasons. It's a risk issue after all. But now that there will be more demand, can the insurers afford to be a bit softer on the elderly?

Shikha Sharma: The fundamental reason why the policies for senior citizens are more expensive is because of the core issue that there are many more healthcare incidence in case of senior citizens as compared to the younger age group. This is pretty much based on the need to go to the hospital or some disease.

I don't think the tax incentive is going to have an impact on the prices. But as more products come in and there is more data available, the insurers will be able to price these products more efficiently. So, the impact on the prices will be felt only after four-five years.

The Budget has hiked the short-term capital gains tax from 10 to 15 per cent, but 80C remains untouched. Does this mean one should now put more money into equity market through the mutual fund route? The FM said in his Budget speech that the hike in the short-term capital gains tax is aimed at benefiting people who are more keen on investing long term.

Mind you, the capital gains tax is zero after a year whether it's an equity fund or a direct equity transaction. The FM hasn't touched 80C at all even though there was a feeling that there will be a slightly higher limit for long-term savings. Does this mean if one wants the wealth to grow in the long-term, he or she must put some component of it in an equity fund, if one is not familiar with the market, or directly into equities?

Milind Barve: It's not the Budget that's going to change that paradigm. This point was true even before the Budget. To my mind, it makes no difference if we have a short-term capital gains tax of 10% or 15%.

The basic issue is if you want to optimise the return on your portfolio, you have to be a long-term investor. And there is enough time-tested evidence globally to prove that that's the best way for an individual small investor to invest his money well.

And in the short run, when you have a higher tax rate facing you, you tend to react to it and ask if it means I need to act differently.

In that sense, I do believe that if it does make investors remain invested in the market for a longer period, it's a good move. But it will be immature to come to a conclusion that it will significantly change the outlook on the market or the way people look at equity markets.

The mutual fund vehicle is always a better vehicle as it helps one to get the expertise of the fund manager. Also, a mutual fund doesn't pay tax even if it buys or sells in the short term. So the fund manager is at freedom to take a short-term view if he is required to do so in the interest of the investor.

Thus you can let the fund manager take a short-term view on your behalf while you take a longer-term view in order to enjoy zero tax. It gives an added advantage and makes a stronger case for you to want to be invested in equities through a mutual fund.

The other point that the Finance Minister made was that an insurance company now needs to pay a service tax on the fees that it will be giving to the asset management. At present the fee gets deducted from the investor initially. There is a perception that in case of schemes like ULIPs, this fees is already very high. Does this new provision make the fee go up even further? What does this mean for the consumer?

Shikha Sharma: First of all, I must clarify that while there is this perception that the charges are higher, if you sit down and do the math, it's evident that if you are holding the unit-linked policy for a four- or five-year period, you will find it a more cost effective way to access the equity market than any other instrument that you might want to use. So, that perception is not quite the reality.

As regards the impact of the new service tax, it needs to be seen if this service tax can be offset by the tax that insurance companies in turn would have to pay on input services. Because there is an offset between input services and output services, which is available.

If it's not possible to offset it, then the service tax will get passed on to the consumer. In such a case, the total cost of a unit-linked plan could go up by 0.15 to 0.2 per cent per annum, which is not a very significant cost if you are talking about a long-term systematic investment policy.

What will be the impact of the introduction of PAN across all financial instruments? The mutual fund industry was quite upset about the plan that they have to bear that for their investors. But the insurance industry was kept out of it. the Finance Minister has now made it very clear that it will be required for all financial instruments from this year.

Shikha Sharma: The Union Budget actually talks about the introduction of PAN, subject to threshold limits. So, as long as the threshold limits are set reasonably and are set in the context of tax deduction limits, I don't think that will be a deterrent for anybody who wants to invest.

Now that the tax slabs have gone up to about Rs 2 lakh, it would seem logical to ask that an investment of Rs 50,000 to Rs 1 lakh should not be mandated for a PAN number. If that be the case, given that the average premium that most people tend to invest in an insurance policy happens to be between Rs 20,000 to Rs 25,000, we really won't have the inconvenience of seeking PAN numbers for most policies and they will be sought only for the large-value policies.

Chidambaram had some more good news for the senior citizens because he has now clarified that there will be no capital gains when a senior citizen receives money by putting his house on reverse mortgage. Reverse mortgage is a very nascent product, which is just about a year old. But perhaps it has not taken off because of lack of clarification.

Subhash Lakhotia: Reverse mortgage is a completely new product, introduced last year for the benefit of senior citizens. But the government has found that this big advantage is not being availed by most senior citizens primarily because of two reasons.

First, most people thought that if they are going to have the concept of reverse mortgage implemented, they will be liable to capital gains tax as it is a transfer of property. But it has now been clarified in the Budget that this doesn't mean a transfer and hence there is no liability of capital gains tax.

Secondly, it was not clear if the amount received by a senior citizen by way of reverse-mortgage of a property will be counted as an income, thus inviting income tax. Again, this issue has been clarified in the Budget that such earnings will not counted as income.

Another key announcement that the Finance Minister has made in the Budget is that if you buy a bond in a D-mate form, you pay no TDS on it. The FM also talked about creating a national market, something which the industry has been talking about for a long time. Now, when an investor invests in a liquid fund or debt fund, how does this move benefit an investor?

Milind Barve: The debt market issue is something that is being discussed for a long time. There has been an RS Patil Committee report which is very comprehensive on this issue and which has created the roadmap for reform in the debt market. What the FM intends to do is get a national platform ready. The key is to get a debt market which is deep and liquid and which overtime allows even retail participation.

I am not sure whether the retain participation is going to get triggered at this stage. But it's important for all the participants in the debt market — whether it's mutual funds, insurance companies or commercial banks — to have a national platform, which will allow us to get a better price discovery and a little more depth and liquidity in the market.

The TDS issue was a bit an irritant, which has probably been taken care of now. I do believe that people will not buy a corporate bond because there is no TDS. Because a lot of the investing entities are not taxable at all. But those who are taxable and who had bought bonds and would have had to take an I-T refund would now be saved of that trouble.

As far as the individual investor is concerned, on a scale of 10, how do the experts rate the Budget?

For Lakhotia it's 7 while both Shikha Sharma and Milind Barve give it a high score of 9.