How the budget impacts your finances

Let’s take a look at how the Budget 08-09 will impact the households in India. Financial Planning is all about personal budgeting, saving, investing and meeting our life goals. So its not just the tax structures affecting our financial plans, there are other factors like inflation, job market, economy, capital markets etc. So one needs to look at the Budget from the macro perspective rather than revolving around the changes in the tax structure and its immediate impact.

Look at the most important proposal in direct taxes i.e. the income tax slabs. An individual’s income upto Rs. 1.5 lakh would now be exempt from tax from the current limit of Rs 1.1 lakh. There is better news for working women and senior citizens. Women will now be getting an exemption of upto Rs 1.8 lakhand senior citizens upto Rs 2.25 lakh. The incomes falling in the higher brackets have also been revised.

An individual having a taxable income of Rs 6,00,000 pa will shell out Rs 1,29,000 pa to the government as income tax in 2007-08. Now, the same 1.29 lacs will fall down to Rs 85,000 pa. That’s a big savings of Rs 44,000, a fall of over 34 per cent in the tax outgo or a savings of over 7 per cent of his taxable income. That’s a freebie. With the Indian economy doing well and shortage of skilled manpower, salaries are expected to rise. To be on the conservative side, assume the salary hike to be 15 per cent in 2008-09. This will show a practical picture of the impact. Going back to our earlier case of a person earning Rs 6 lakh pa, he will now be earning Rs 6.9 lacs in 08-09. The same person will now be saving only Rs 17,000 on the income tax outgo. That’s a mere 13 per cent fall in tax outgo or a savings of over 2 per cent of his taxable income.

Though we can cheer the Budget now. We need to keep our foot on ground in the income tax planning in the coming years. When FM spoke of consolidation, it might also mean the tax rates and slab rates may not be altered much for a long time to come. So tax outgo will only rise with increasing salaries.

The revised tax slab incorporates the benefit of possible increment in salary being realised in the hands of the salaried class taking into account inflation. It is indeed a “real” benefit to the salaried class. However, it is pertinent to be prudent to learn to save. This additional windfall is given by the FM in the interest of the Financial Planning and long term benefits. Hence, if this additional amount, if saved appropriately keeping in view the long term benefit, would give an opportunity for good retirement planning as well. The new budget proposal of enhancing short term capital gains to 15 per cent from existing 10per cent will ultimately go in favour of financial planning as it will tend to reduce the mentality of realising short term gains presented to the investors by sharp market volatility.

The writer is CEO , FPSB