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Union Budget 2018 (Part 1)

10-02-18

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Union Budget in India has always been more than the presentation of numbers. Government uses this as a platform to communicate its key priorities. Budget 2018 is no different, Finance Minister communicated the emphasis on the basics (Roti, Swasthya and Makan). Apologies for replacing “Kapada” with “Swasthya”, we thought “Health” was one of the most important takeaways from this budget. Termed as “Aayushman Bharat” or “Modicare”, it is one of the largest and most ambitious universal health care schemes in the world. Implementation has and will always remain a challenge in India. Health has been one of the most ignored areas and we are just happy to see it coming mainstream.

We have decided to break down our budget analysis into two articles. This one will focus on how it will impact you personally and the second one (coming next week) will be more generic.

Except of brief acknowledgement on tax contribution by salaried individuals, budget has not given much to cheer about.

 

Since the list of positives is small, lets start with that:

 

POSITIVES

1) Standard deduction of Rs. 40,000

This will be in lieu of the present exemption of Transport allowance and Medical Allowance. The actual benefit from this exemption, however will be meagre Rs. 5,800 (40,000 – (19,200 + 15,000)). What is given from one hand is being taken from another, there is increase in cess from 3% to 4% (Health and Education Cess). The only benefit seem to be riddance of storing those medical bills, you get a straight standard deduction.


2) Higher takehome for women employees

The PF Contribution of women employees has been reduced from 12% to 8%, which will result in higher take home for them. Employer will continue to contribute 12%. However we are not sure if it’s a good idea, as money in hand usually means money spent. We hope women employees will take advantage of this increased cashflow and invest towards future financial goals.


3) Host of incentives for Senior Citizens

- Senior citizens can claim Rs. 50,000 deduction instead of Rs. 10,000 from the interest earned from Savings account, FDs, RDs and Post Office deposits (new section 80TTB).

- Deduction under 80D has also been revamped. This will be applicable for the tax payer who is senior citizen as well as for someone paying for them (ie parents).

- FM also proposed to increase the amount of deduction under section 80DDB in respect to medical expenses incurred by the senior citizen. This will be applicable for Medical expenses incurred for specific diseases only (indicative list is here).

 

Lets bring our attention to negatives:

NEGATIVES

 1) Long term capital gains tax on Equity investment

All of us had just started to appreciate the power of Equity (Equity MFs and Stocks) as a source of wealth creation, zero tax (on long term capital gains) made it all the more attractive.

Not anymore, Govt will levy a tax of 10% on long term capital gains (only on gains in excess of Rs. 1 lakh per financial year). As the table below illustrates, Equity still remains one of the most tax friendly asset class.

Since all the budget decisions are prospective in nature, FM introduced a grandfathering clause to prevent the impact on past investments (until the day before budget – 31st Jan’18). The example below explains the implication of this clause in various scenarios:

Higher of the following two:
a) Actual cost price
b) Lower of Sale price and Price as on 31st Jan, 2018.


2) Dividend Option no longer favorable

To bring the tax parity between growth and dividend option of equity oriented (including balanced) mutual funds, 10% dividend distribution tax (DDT) will be applied on the latter. For those seeking regular income, we have always believed SWP (systematic withdrawl plan) is better as compared to drawing dividend from balanced mutual fund schemes.

With just a year to go for 2019 elections, most people were hoping that it would be a populist one. As evident from above, there is not much to cheer about as far as personal taxation is concerned. The focus of the budget was on roti (farmers, agriculture), swasthya (national health protection scheme) and makaan (housing, infrastructure).

 

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