Personal finance to see minor changes

MUTUAL FUNDS: The pre-budget buzz indicates many changes in this space to make it even more lucrative for the small investor to take the mutual fund route to the markets:

• Double taxation in the Securities Transaction Tax (STT) to go. Mutual funds pay 0.1 per cent STT while buying and selling stocks from the market. Investors also pay 0.2 per cent STT when they redeem their units, effectively paying double STT. This anomaly should get rectified.

• Fund of Funds that invest more than 50 per cent in equities do not get the long-term zero tax status that equity funds get. This should see a change, getting the FoFs at par with other equity schemes.

• Debt-oriented funds and closed-end funds pay a dividend distribution tax of 14.03 per cent today. This tax may go, making the two products comparable in taxation terms to the equity-oriented funds.

• New Fund Offers (NFOs) today can charge up to 6 per cent of the collection to the investors in the scheme, amortised over five years. This has lead to widespread churning. The Budget may see a change in this load structure to make it work for retail long-term investors.

INTEREST INCOME: Interest income upto Rs 15,000 a year used to be tax exempt till last year. The removal of Section 80 L has upset the retired who look for a zero risk return. To make the deposit compete in the market, the Finance Ministry may make the interest income from a long-term bank deposit (up to five years) exempt, within or outside of the Rs 1 lakh Section 80 C deduction.

NEW TAXES: Part of the Left wish list, wealth tax may see an increase from the current 1 per cent on real assets over Rs 15 lakh, to 3 per cent per year. The Left has also demanded the return of the more controversial Inheritance Tax, a tax on the inter-generational wealth transfer.

INSURANCE: Pension plans from insurance companies come under Section 80 CCC and investors can get a deduction for a maximum contribution of Rs 10,000 a year. This budget may see the sub limit of 10,000 to collapse into the overall 1 lakh 80 C limit, bringing the product at par with the pension plans from mutual funds that have a Rs 1 lakh limit under Section 80 C.

EET: The EET sword has been dangling for the last year and the Finance Ministry seems determined to take away the super icing on the zero risk government assured products. It has recently removed the 10 per cent bonus on maturity that Monthly Income Scheme accounts from the Post Office used to get. New accounts will not get this bonus. Other products like PPF, PF and insurance may see an exit tax come into being this year on new accounts. Old accounts are likely to be grand-fathered.