Save the windfall

By revising tax slabs upward the finance minister has put more money in your pocket. Instead of frittering away this windfall,invest it in a long-term investment instrument....

It was the post-budget weekend. I had just read through the Finance Bill 2010 and was browsing through some newspapers when Vivek,42,walked in. Looks like you have gone through the budget with a fine comb, he said,pointing towards the document that lay beside me. Reading through it is just the beginning. It takes a few days to understand the fine print and its implications, I replied. I have heard that fuel prices are going to rise, said Vivek. But that does not bother me too much, he continued. I am aiming to buy the Toyota Prius if only it were a little more affordable. Looks like you may be in luck, I said. This budget had a significant focus on green energy and has reduced custom duty on electric vehicles. It is possible that this may reduce the price of the Prius. At least imported electric cars should be cheaper.

Thats great,exactly what I need, responded Vivek. Does the budget bring along any other piece of good news? he enquired.

Income tax slabs revised

First,there has been a change in income tax slabs. For Vivek,an architect,whose taxable income is Rs 8 lakh,the saving will be about Rs 50,000 annually. This amount of saving will be enjoyed by all those who have an income of Rs 8 lakh and above. There will be some reduction in the tax payable for everyone having a taxable income of over Rs 3 lakh see table: How much do you stand to save?.

That is fantastic, he said. Compensates me for the rise in fuel costs till I get an electric car! he beamed. Second,for professionals like Vivek the compulsory audit limit has been raised to Rs 15 lakh. This means that only professionals architects,lawyers,etc whose gross receipts are over Rs 15 lakh need to get their accounts audited by a chartered accountant CA. Earlier this limit was Rs 10 lakh. This should save you some time and the audit fee that the chartered accounting firm charges you, I said.

But that is not all, I added.

More deductions available

The benefits of Section 80C continue. As in previous years,you can invest up to Rs 1 lakh in tax-saving instruments such as Public Provident Fund PPF,PF,Equity linked Saving Schemes ELSS,etc. Now,in addition to these,you can get an additional deduction of Rs 20,000. To avail of this deduction,you must invest Rs 20,000 in long-term bonds of infrastructure companies. These bonds will be notified shortly. This raises your total deductions from Rs 1 lakh to 1.20 lakh,plus the deduction available on health insurance. Vivek smiled. Will my wife Riya also be able to avail of this additional deduction? he asked. Riya is a salaried employee with a large private bank. Of course,she will, I replied. Not only that,the income tax form for salaried employees has been simplified,so filing returns for her will be easier.

I will believe that when I see it! said Vivek.

Dearer health insurance

I then told Vivek that it was a good thing that he had quit smoking three years ago. You know,Veer,I did not realise that I was spending quite a bit on cigarettes. I now give that amount to charity every month, Vivek said. A very noble deed, I replied. You may want to hike that donation since the prices of cigarettes and other tobacco products are likely to increase. But one area that will affect most of us is health insurance. It appears that the Budget has imposed service tax on payments made to hospitals by insurance companies. This would mean that healthcare bills for insurance companies will be 10 per cent higher. In all probability,they would pass this on to the customer. Fillip to NPS Did the minister make any taxation changes to the New Pension System NPS? enquired Vivek.

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No,the NPS remains taxable on maturity. The only incentive is that the government will contribute up to Rs 1,000 for those who contribute a maximum of Rs 12,000 per annum. That will exclude both Riya and you; unless you want to try out the NPS for a few years by contributing small amounts.

Vivek shrugged. He had not given NPS much thought due to its adverse tax treatment. Tell me how I can use the changes in this budget to my long-term advantage.

What should you do?

Those earning above Rs 8 lakh will have a Rs 50,000 per annum surplus. Of this,deploy Rs 20,000 in the newly announced bonds. These bonds will save you around Rs 6,000 in tax. So you now have Rs 36,000 Rs 30,000 remaining of the original Rs 50,000 plus another Rs 6,000 to deploy. Without these budgetary changes you would never have had this surplus. Therefore,you can certainly keep it aside for five years without affecting your lifestyle. I would recommend investing Rs 36,000 per year in equities. An index-based exchange traded fund ETF or a well-managed index fund could be used. Depending upon the savings the budget brings,everyone,including Riya,can follow a similar investment pattern. Sounds like an interesting plan, Vivek announced. Lets have some coffee now, I said.

The author is the chief executive of Sardesai Finance. ceosardesai.com