Invest all or a part of the Budget windfall

Atul was happy. The Budget has also raised the wealth tax and income tax exemption limits. Atul’s total taxable wealth consists of a second apartment that is lying vacant,his new car and jewellery whose total value stood at Rs 29 lakh last year. As a result,he was liable to pay tax at the rate of 1 per cent for the amount by which his wealth exceeded Rs 15 lakh. So,on Rs 14 lakh Atul had paid wealth tax of Rs 14,000 last year. This Budget has increased the limit from Rs 15 lakh to Rs 30 lakh. This has exempted Atul entirely from paying any wealth tax.

Income tax exemption limits have also been raised for all tax payers. In Atul’s case,the limit has been raised by Rs 10,000. It means that a person earning up to Rs 1,60,000 per year is now exempt from paying any tax. For all tax payers there is now a saving of at least Rs 1,000 per year. Unfortunately,there has been no change to the provisions of Section 80C.

“You could think of making those donations to political parties that you have always wanted to,” I said. The Budget has announced that donation to an electoral fund registered under CBDT (Central Board of Direct Taxes) would entitle the taxpayer to an exemption on the entire amount. “Looks like there will be some transparency in the funding of political parties,” Atul said. “Anything for Seema or her sister?” he enquired.

Atul’s wife Seema,35,is a school teacher. She was happy to hear that the income tax exemption limit has been raised for young women as well. As a school teacher she earns Rs 1,90,000 a year. With the increase in exemption limit by Rs 10,000,she would save at least Rs 1,000 in taxes this year.

I knew Seema was the one who filed the tax returns for the family. Given how complicated the current tax form is,she finds the job tedious. In his Budget speech,the Finance Minister promised a much simpler Saral II form that will be introduced soon.

Invest your gains

I suggested that what Atul and Seema will save in taxes in the coming year should not be splurged on items of conspicuous consumption but invested. I suggested investing the savings in the Systematic Investment Plan (SIP) of a good index fund. “You won’t miss the money since you managed without it last year. A small amount invested periodically in an equity fund makes a good long-term investment,” I advised.

Seema’s sister has a son who suffers from a severe physical disability. Till recently the parent could claim Rs 75,000 as deduction from his income for looking after the disabled boy. In this Budget the Finance Minister has increased this deduction under Section 80-DD to Rs 1 lakh.

The Budget has something for Seema’s father,a senior citizen,as well. The exemption limit for senior citizens has been raised by Rs 15,000 to Rs 2,40,000. This will give him an annual tax saving of at least Rs 1,500.

“Is there anything that will benefit my household help’s son?” asked Atul. He further added: “He is a bright boy,currently studying in the 12th standard. But due to his family’s poor economic condition I worry who will fund his higher education.” The Budget has announced a total subsidy during the moratorium period on education loans to economically weaker sections of the society. This seems to indicate that no interest will have to be paid by the student until he gets a job (or six months after finishing his course,whichever is earlier). “That’s okay,” said Atul. “But what if he does not get into a professional course and takes on a vocational study course?” “Well,” I said,the government has extended the tax benefit under Section 80D to all fields of study. Till date,only students in professional courses were entitled to claim a deduction on interest paid once they began earning. Now students from all courses can claim the interest paid on their educational loan as an exemption from their income once they start earning.

Atul was pleased. But I warned him that this was only a preliminary analysis and more details would be available in the fine print of the Budget document. “You must wait till then before taking any action,” I said. He thanked me and hung up.

The author,a certified financial planner,is the chief executive of Sardesai Finance. ceo@sardesai.com