The Finwise Take on Budget 2020-21

The Finwise Take on Budget 2020-21

Over the years, the significance of the Union Budget has come down and doesn’t have such an impact on our everyday lives, and hence doesn’t interest too many of us anymore. That said, there are still some, especially those in the finance businesses, for whom listening to the Budget is a yearly ritual.

Budget 2020 and its impact on your personal financial plan

But given the negative news as well as poor economy numbers over the last couple of quarters, we would dare say that the FY21 Budget presented last week had more than a usual number of people waiting for it. For most, last week would have been one of anticipation for Saturday to arrive and hope that the finance minister has something up her sleeve to magically move the economy into 4th gear, trigger consumption, improve rural incomes, increase investment, ease credit flows and banking woes and overall reverse the prevailing sentiment, while of course ensuring that the fiscal deficit doesn’t scarily worsen.

Many articles have already dissected the Budget presentation as well as the detailed document post that, so we will not attempt a repeat of that. But even for the most disinterested observers, the least they would have expected is how the budget will put more money into our pocket or at least ease our difficulties in dealing with taxes. So, we have looked at how this year’s budget has panned out for your personal finances and identified 6 changes which could affect you personally.

 

 

  1. Changes in Income Tax structure

Who doesn’t love choices? Whether its plain simple breakfast or choosing your next outfit we love it when we have choice, don’t we? However, that doesn’t seem to apply to Taxation structures. This year’s budget has changed the tax slabs but left the choice of sticking to the previous tax slabs or switching to the new ones to you. The catch is if you switch to the new tax slabs, you cannot avail of any of the deductions & exemptions currently available. Here is a quick look at the tax slabs that are currently in existence and the new ones which you can choose to switch to.

 

How do you decide which of the two options you should choose? What you need to look at is the deductions and exemptions you are currently availing of. The most popular ones being

  1. Rs 1.5 lakh under 80 C, the default option for most being EPF (ELSS, PPF, Life Insurance, School fees, Principal repayment of home-loan etc)
  2. Medical insurance premium under section 80D of Rs 25,000 for self and Rs 50,000 for senior citizen parents (total of Rs 1,00,000 if both self and parents are senior citizens)
  3. Additional deduction of Rs 50,000 for investments in NPS
  4. Deduction of 2L on interested paid on a home loan under section 24(b)

 

Prevailing & Proposed Optional Income Tax Slabs proposed in Budget 2020

Broadly, if you are claiming home loan interest deduction apart from 80C, you are better off with the previous tax slabs. But if you are not and do not have default investments like EPF for claiming deductions under section 80C and you are currently investing in products especially for the deductions, you can opt for the new slabs.

 

Finwise Take While there is a choice being given currently, the intention clearly articulated has been to move away in the coming future from the exemption and deductions being offered currently. Given this scenario, if you are buying a house or starting a new NPS account primarily to avail of the exemption you may want to rethink your decision.

Currently, a large number of investment decisions are made (and products are sold) at the last moment, primarily on their tax-saving features. We think this is a good step since the products thus bought will pass the tests of suitability towards risk profile and time horizon, and will help investors create substantially more wealth than now. You would be better off seeking the help of a financial advisor to help you make the right decisions customised to your needs, especially given the above.

 

 

  1. Increased insurance cover for FDs

Currently each depositor in a bank is insured upto Rs 1,00,000 inclusive of both principal and interest. This budget has increased this insurance limit to Rs 5,00,000, and this would help increase coverage and bring a greater number of impacted people under the insurance fold in case of bank defaults. This will give a lot of comfort, especially to senior citizens, for whom this is the investment of choice.

 

Finwise Take While increased insurance cover is a welcome step, it can give investors, especially senior citizens who look for that extra percentage point to prop up their meagre savings, a false sense of security about otherwise “dangerous” investment options in this space.

Our belief is that this insurance benefit is a “perceived” comfort. This insurance is payable by the Deposit Insurance and Credit Guarantee Corporation of India, a subsidiary of the RBI. DICGC will wait for the “defaulter” bank to be liquidated and de-registered, post which the DICGC receives claims from the banks and then pays out the claims, post necessary validations. The wait can be many years for impacted customers, and this risk is definitely not worth taking for extra percentage point of interest.

Our advice to our customers has always been to be safe with debt investments and not take any kind of risk with debt. Credit risk while investing in banks like PMC was ignored and has now come to the forefront. Insurance or no insurance, it is important not be lured by a few percentage points higher return. We often tell our customers to beware of higher interest rates, which some banks or institutions are offering, since higher-then-prevailing interest rate means higher than intended risk, which is opaque to the retail investor and our stance holds going forward too.

 

 

  1. TDS introduced for FDs in cooperative banks

Now, cooperative banks will also need to deduct tax at source on fixed deposits and recurring deposits if the interest exceeds 40K (50K for Senior citizens).

 

Finwise Take Earlier this was another big draw for investors to invest in co-operative bank FDs, apart from the higher interest rates. This welcome move will encourage people to think beyond tax and interest rate, while choosing their bank for FDs.

 

 

  1. Cap of 7.5L on exemption to retirement contribution by employer

As of now employer contributes 12% of basic towards EPF, Rs. 1,50,000 towards super annuation and 10% of basic towards NPS, and any amount of contribution to retirement benefits is exempt from income tax ie. is deducted from your gross income to calculate taxable income. The new budget has introduced a cap to this exemption, from the next FY, only contributions upto Rs 7,50,000 put together towards all retirement benefits will be exempt and any contribution over and above that will be taxed at your slab rate.

 

Finwise Take This is a big change and has a significant impact on high net-worth individuals having corporate careers. Senior corporate professionals earning approx. Rs 1 cr or above are likely to be impacted by this while, of course, actual impacts will be dependent on individual salary structures. For eg. someone earning a basic of Rs 2,50,000 per month, will have an annual retirement benefit contribution of Rs 8.1 lakh (assuming contributions to all 3 benefits – EPF, Super-annuation & NPS), and will cross this tax-exempt threshold. For people with such high salaries, this will mean rejigging compensation structures to reduce institutionalized retirement benefits, which in turn will have the negative impact of also reducing the retirement corpuses that these benefits create, requiring such individuals to plan better individually for their retirement.

 

 

  1. No more Dividend Distribution Tax

Currently, dividends received from shares and mutual funds are not taxed in your hands, they are paid post payment of DDT. DDT for shares is 20.56%, equity mutual funds is 11.64% and debt mutual funds is 29.12% before paying out the dividends. With new budget provision the dividend will be added to your income and taxed as per your income slab.

 

Finwise Take While this is a welcome step for corporates, especially MNCs, since dividend income to MNC shareholders was earlier taxed and is now free, it not such good news for retail investors, especially those in the higher tax brackets.

If you have a largely direct-equity portfolio, the dividend yield will fall substantially. You should consider shifting to equity mutual funds under the growth option where the tax outflow is capped at 10% long-term capital gain, that too on redemption, for investments over one year.

If you have invested in equity mutual funds (both pure equity & equity hybrid) in the dividend option, you should shift to the growth option immediately, for reasons similar to above, since the differential impacts here are even higher than in direct equity.

For debt mutual funds, the approach was dual. For people either in lower tax brackets or for long-term debt allocations (> 3 years), it always made sense to remain in growth, since both tax slab rate and LTCG on debt is lower. Whereas only for investors in the highest tax slab for short term investments (< 3 years), dividend option was better, since the STCG on debt is as per tax slab. With this change now, across the board, growth is the option to go with in debt mutual funds.

Also, one needs to remember that this has made tax-returns filing a bit more cumbersome, since dividend incomes now need to be added to overall incomes to calculate taxes, which earlier was not the case, with DDT.

Just in case an investor in the lower tax bracket is holding on to debt funds under the dividend scheme (due to poor advice or ignorant purchase), they will be hugely benefited as they would need to pay tax as per slab which is lower than the 29.12% being paid by the debt funds.

 

 

  1. Key changes for NRIs

Announcements in this section set the cat among the pigeons for NRIs, before clarifications led to clarity and calm. Some key changes

  • Taxation of global incomes of NRIs who are not tax-resident in any other country
  • Definition of Resident-tax – 120 or more days in India (reduced from earlier 182 days)
  • Definition of Resident but not ordinarily-resident – transition period increased to 4 years (from earlier 2 years)

 

Finwise Take → After giving a big scare to NRIs based out of the Middle East regarding taxing global income, there has been clarity that global income of residents of any country will not be taxed. While this doesn’t impact people resident in tax-free countries, people working in the merchant navy etc. may be impacted, since their long-period travels across the world may lead them to fall into this category of Non-Resident Indian but not resident of any other country.

In addition, such people will be doubly impacted by the second clause above, since they need to ensure they live in India for less than 120 days to classify as non-resident, as against 182 days earlier.

The last clause above is beneficial for NRI’s returning to India after living abroad for many years since it will give them more time without taxing their global income.

 

 

Do note that these are broad-based observations and not necessarily one-size-fits-all, do consult your financial planner / advisor for customized advice on your particular situation.

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Budget 2019 – How does it affect your individual personal financial plan?

Budget 2019 – How does it affect your individual personal financial plan?

The interim budget was presented on 1st Feb 2019 and has already receded to the background in most conversations. Now that the dust has settled as well as clarity obtained on a few new proposals, it is a good time for us to look at and quickly recap how this year’s interim budget weighs upon our personal finances.

The one thing which is usually on every salaried person’s wish list from the budget year after year is tax breaks, and this time we did see some welcome changes. A lot of positive moves for those in lowest tax bracket and some for the mid and high-income category too.

No tax if taxable income below Rs. 5 Lakhs, standard deduction raised from Rs. 40,000 to Rs. 50,000

Rebate of Rs. 12,500 has been given to people with taxable salary of upto 5 lakhs, thereby ensuring that people belonging to this group will pay zero tax. Note that if your taxable income is higher than Rs. 5 lakhs you will continue to pay 5% tax for income from Rs. 2.5 lakhs to Rs. 5 lakhs.

The key word here is taxable income, meaning income after considering all deductions. This means that people with gross incomes higher than Rs 5 lakh, in fact upto Rs 10.35 lakh can end up paying zero tax, assuming the person has made maximum investments basis eligibility.

Sample illustration on how to calculate taxable income post all deductions

The attached table clearly illustrates how a person with gross income of 10.35 lakhs will still avail of the rebate and end up paying no tax. This is for someone with no HRA, donations or education loan, a person having any of the above will end up paying no tax on even higher incomes than Rs 10.35 lakh. The fact that a person earning close to Rs 90,000 a month can end up paying zero tax if she plans her investments is a huge positive.

The standard deduction which was at Rs 40,000 has now been increased to Rs 50,000. This benefit is available to people across all income slabs and not just < Rs 5 lakh pa.

Limit for deduction of tax at source (TDS) for interest on FD has been raised from Rs 10,000 pa to Rs. 40000 pa

This will come as a relief to many pensioners as well as people having FDs as a contingency asset. With lower limits of TDS, one needed to fill forms and submit it on time to avail of non-deduction of TDS. This will be a welcome change making the process hassle free.

No tax on second self-occupied house on notional rent

People having two houses were required to pay tax on notional rent on the second house, even when they choose not to rent out their premises. This is a very thoughtful benefit and has been extended given the fact that the number of working couples who are forced to work in different cities to pursue their careers and build their lives is increasing. Hence going forward, people who have two houses due to various reasons can now breathe a sigh of relief.

You can reinvest your long-term capital gains in two houses instead of one.

If long term capital gains accrued on sale of a house does not exceed Rs. 2 crores, then you can avail capital gains re-investment benefit across two residential houses instead of one under section 54. This benefit is available to an individual only once in a lifetime. This again is a thoughtful benefit extended, keeping in mind inter-generational purchase of houses, due to greater nuclearization of families.

However if the capital gains exceed Rs 2 crore than old rules will still apply and to avail of the benefit you will have to invest in 1 residential house.

In our opinion though, in case one is not obliged to re-purchase a house (to meet familial needs), it will make better sense to invest capital gains in Sect 54 EC bonds for a period of 5 years rather than locking up capital in in low-yielding real estate. Post the lock-in period, one can look at financial assets which have potential to make much higher returns.

Pension for unorganised sector workers

In our opinion one of the highlights of the budget was the pension scheme announced for unorganised sector workers. We all see our maids, drivers and numerous other people struggling to make ends meet and retirement is definitely not on their priority. Pradhan Mantri Shram Yogi Maandhan Yojana promises a minimum pension of INR 3000 pm at age 60 on minimum monthly contributions.  A 29 year old, will need to deposit INR 100 a month to avail of this pension. This scheme now provides a much needed social security net for the huge number of unorganized sector workers across the country and each one of us should ensure that our safety nets ie. our domestic helps avail of this scheme so that they too can have their own safety nets.

Finwise is a personal finance solutions firm that helps both residents and NRIs plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

The 3 most important words I have said as an adult

The 3 most important words I have said as an adult

Becoming an adult is one of the biggest thresholds that a human being crosses in his or her life. For a young one on the verge of this threshold (for context, we are talking here about the legal definition of crossing the age of 18 years), it comes with the promises of many excitements and thrills. It is about being an independent person (As Bollywood would say – apne pairon par khada hona), owning a driver’s license, the right to cast a vote, legally marrying a partner and much more. It also comes with the sense of responsibility of having to fend for oneself officially since he or she is no longer on someone’s dependent list. It is also about being responsible about making many important life choices, including partner and career.

 

So, all of my readers, tell me, which do you think are the most important 3 words that you have ever said since becoming an adult? While I am sure there would be many, am putting down below a few which I would think make the top of the list.

 

Right at the beginning, there’s the cliched but very important “Mujhse shaadi karogi / karoge”. Arguably one of the biggest decisions that a young adult makes is to select his or her life partner and these three words signify a huge commitment that one makes, one that is expected to last the entire lifetime. These 3 words would count as some of the most important words said, and rightly so.

 

But there are others. As the early excitement wears off adulthood and responsibilities begin to make themselves felt, 3 more important words are uttered, this time, “Buy a house”. Important because, these signify a long-term financial commitment that the young adult makes from the meagre salary that he or she makes, all for the promise of “apna ghar”.

 

And then, as the years pass by, either due to personal choices or egged on by familial pressures, the next set of 3 words get uttered, these being “Start a family”. Again important, because, apart from long-term financial commitments, these words also add the responsibility of bringing up new lives in this world, with the right set of values, just as the adult was brought up, many years back.

 

There may be more, but I would guess the above 3 would largely be the 3 biggest decisions that any adult would take in his or her life, especially in their early adulthood years. I have to admit, I have uttered all the above, and whenever I said them, they felt to me at that time to be the most important words that I have uttered until then.

 

So then, which of these 3 were my most important words, you ask? Well, while at the time I found each of these to be very important, let me say that my most important 3 words are none of these, especially with the benefit of hindsight. So, what are my most important 3 words?

 

My most important 3 words were uttered some years back, in what I would like to think was a moment of enlightenment. And they were – “Become financially free”.

 

Let me explain. Like most adults my age, I was caught up in the race to build assets and fulfil responsibilities, and like all others, went about “ticking” off the various “goals” – namely marriage, first house, second house, children, nice cars, latest gadgets, name it. Thankfully, both me and my spouse Prathiba come from middle-class families and still remember those struggles that our parents went through in bringing us up. Somewhere, as we were zipping along merrily through this “tunnel”, prudence prevailed and we also started looking for the light at the end of it.

 

It was then (about 8 years back) that Prathiba and me decided that we would become first debt-free and then work towards becoming financially free. We achieved our first goal of becoming completely debt-free about 5 years back and since then are working our way towards achieving financial independence. For us, financial independence means having enough money or assets to take care of our major goals in life, allowing us to work towards one’s passions.

 

Following this and emboldened by our own experience, Prathiba left a lucrative private sector career and founded and successfully runs a Financial Planning firm called Finwise Personal Finance Solutions some years back, which helps families plan for and achieve financial independence.

 

As far as I am concerned, I spent a few more years in the corporate world to bolster our financials and have recently left the corporate world to join Prathiba and grow Finwise to the next level. This would have been unthinkable a few years back, but timely planning as well as diligent focus over the last few years has allowed us to take this bold step.

 

So, now that you have heard my story, what’s yours? Have you discovered 3 new words that seem important to you? Do you wish to get on the path of financial independence? Do write in to me with your thoughts at getfinwise@finwise.in.

 

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image credit: Unsplash.com, Shot by Victor Rodriguez

Budget 2015: How does it affect your personal finances?

The Budget is something most of us look forward to with excitement. Our top most concern with the budget is to see if there are any changes in tax slabs which could affect us positively, leaving us money to spare. This year we are done and dusted debating the budget and registering the fact that there are no changes in slabs for us tax payers. Though, while the slabs have not changed, there are some announcements which could impact your personal finances.

budget image scrabble

1. Deduction for INR 50,000 p.a. for investments in National Pension Scheme (NPS)
This budget has provisioned for deduction of INR 50,000 for investments in NPS, under section 80CCD. This is over and above the deduction of INR 150,000 already available under section 80C. One must note that while investments in NPS are exempt from tax the proceeds are not tax exempt. Currently part of the corpus accumulated through NPS can be withdrawn as lumpsum on maturity and the rest will be given as annuity post maturity; both of these will be taxable.

2. Increase in limit for medical insurance from INR 15,000 to INR 25,000. For senior citizens the limit has increased from INR 20,000 to INR 30,000
You can now claim a higher deduction for premium paid towards medical insurance under section 80D. While deduction allowed for non-senior citizens has been increased from INR 15,000 to 25,000, for senior citizens the limit has been raised from INR 20,000 to INR 30,000. Therefore if you are paying a premium for both your family (spouse, children & yourself) & your parents who are senior citizens, the total deduction available to you would be the lower of INR 55,000 & actual premium paid.

3. Transport allowance increased from INR 800 to INR 1600 per month
If your salary structure has an allowance called transport allowance, INR 800 per month totaling to INR 9,600 per year was exempt from tax. This amount has been doubled to INR 1,600 per month ie. INR 19,200 per annum.

4. Interest paid to beneficiaries in Sukanya Samriddhi Scheme will be tax free
A scheme to encourage savings for the girl child Sukanya Samruddhi was launched in January this year. This was a welcome option paying 9.1% interest (interest to be fixed on an yearly basis like PPF) aimed at encouraging long term savings for the education and marriage of the girl child. The interest to be paid was earlier taxable. This budget has made interest to beneficiaries in Sukanya Samriddhi account non -taxable which makes it an very interesting investment option.

5. Wealth tax abolished
The number of people paying wealth tax may have been very small but the law required anybody having assets in excess of 30 lakhs to pay wealth tax. Many people who did not pay wealth tax were on the wrong side of law, and in such cases, ignorance cannot be a defense. This budget has abolished wealth tax to be replaced with a surcharge for the super-rich. This has done more for our peace of mind than for our finances.

The finance minister during the course of his budget speech said that relief to the tax payer will be to the tune of INR 4, 44,200. The calculation he was referring to is as follows
1) INR 1,50,000 under section 80C
2) INR 2,00,000 for repayment of interest on a home loan for self-occupied house (For a house which is let out on rent, entire interest paid can be set off against house rent received )
3) INR 25,000 under section 80D for premium paid towards health insurance (if you have parents who are senior citizens whose health insurance premium is paid by you the deduction will go up to INR 55,000 as mentioned above)
4) INR 19,200 towards transportation allowance

Few more points which need to be noted are

  • The increase in service tax from 12.6% to 14% is an indirect hit since service providers transfer this cost to the end customer. This can be a substantial hit.
  • If you are a salaried person you can now choose between investing in EPF & NPS.
  • Employees with salary below a certain level will be allowed to choose if they want to continue their contributions to EPF or stop the same; the employer will still be obligated to continue his contributions.
  • Gold scheme to be introduced, where you can deposit physical gold (except in jewelry form) and earn interest on it.
  • Gold bonds to be introduced where the movement of price of bonds will mirror gold prices.
  • While interest paid on Recurring Deposits were taxable, TDS was not being deducted from the same.