Budget 2014-15 may not go down as the most impactful budget for your moola, although its wide reach in terms of macro economic and social development would all have an indirect impact for you.
For now, let’s take a quick look at some of the direct tax proposals and their impact on your money and investments:
Tax slab and tax deduction on investments
– The minimum income slab which is exempt from tax has been increased from Rs 2 lakh to Rs 2.5 lakh for those less than 60 years of age. For those above 60 years of age and below 80 years, the same is proposed to be increased by Rs 50,000, to Rs 3 lakh. The Rs 5 lakh income slab exempt for those above 80 years remains the same.
Effective April 1, 2015 Investments that qualify for deduction under Section 80C of the Income Tax Act will now have a overall ceiling of Rs 1.5 lakh from Rs 1 lakh earlier. That means your investments under this section – including PPF, tax-saving mutual funds, NSC, insurance premium, home loan principal and so on can be increased by Rs 50,000.
– Interest on your home loan for self-occupied property is currently allowed deduction up to Rs 1.5 lakh. This is proposed to be increased to Rs 2 lakh
from April 1, 2015 (please note that the budget proposal says effective April 1 2015 for AY 2015-16. This may please be interpreted as effective for FY 2013-14)
All the above measures put together, if utilized fully, would result in a saving of Rs 15,450 for a person in the 10% tax bracket, Rs 25,750 for those in the 20% tax bracket and Rs 36,050 for individuals in the 30% tax bracket (for those less than 60 years of age).
Capital gains on debt mutual funds
Thus far, non-equity mutual funds held for more than 1 year qualify for indexation as long term capital gain. This time frame is now increased to 36 months. That means you will have to hold non-equity mutual funds for 3 years to enjoy indexation benefits.
Also, currently the tax on debt mutual funds is 10% without indexation or 20% with indexation. The 10% option is proposed to be withdrawn. You will still have the 20% with indexation option. This change is effective for sale or redemption of funds.
made from April 1, 2015
Please note that the budget proposal says effective April 1 2015 for AY 2015-16. This may be interpreted as effective financial year 2013-14. That means if you had held a non-equity mutual fund for less than 3 years and sold it any time after April 1, 2014, it would be treated as short-term capital gain and taxed at your slab rate. Any holding that crosses 3 years at the time of redemption will only be eligible for indexation benefit.
What does this mean to you as a debt fund investor?
– For those who invest in debt income funds as part of their asset allocation for their long term (over 3 years), no harm done, as you will continue to benefit from indexation. In fact inflation indexation in the last 3 years was so high (9.2% annualized in the last 3 years) that you would not have paid almost nil tax on most of your debt fund investments.
– It is only those with a 1-3 year view in debt mutual funds who need to be aware of the loss of indexation benefit. Even there, in a falling interest rate market, the returns in this segment could still beat traditional options such as fixed deposits, as the price rally can generate superior capital appreciation.
We will come out with a more detailed note, in a couple of days, of what should be your strategy with respect to debt investments.
New avenues and easing of processes
Besides the above tax impact, the new Government, in an attempt to revive small savings, has planned to reintroduce Kisan Vikas Patra. A special small savings instrument for the girl child and a National Savings Certificate with insurance cover will also be launched.
Proposal to introduce a single demat account for all financial transaction, single KYC across financial sector and a unified account scheme by EPFO to ensure provident fund portability are all measures that may make your investing life a bit easier.
We will soon come out with a more detailed note on budget and what should be your strategy.