Indian budget and impact of salaried class

[jaiganes]

Hi all,
The union budget for 2005-06 year has been presented in the floor of the Indian parliament. As usual he has concluded the speech with a quote from "Thirukkural". This budget is sure to affect the investment patterns of middle-class working professionals due to various changes to the tax slabs and structures. Classic example is the scrapping of section which enabled huge investments in insurance policies for tax relief. The exemption of 30% on principal portion of Housing loan is also gone. These are some negatives among other positives in the union budget. Let us analyse the budget from a personal perspective and discuss better options of tax saving as it applies to typical middleclass working professionals.
The union budget can be read h e r e (http://indiabudget.nic.in).

[scorpio]

JG,

So, you open threads for some intelligent (?) discussions too, apart from fighting with female hubbers??

Well, first impressions are here-

1. Standard deduction removed across all levels is sad but anyway, I have to calculate and see how it helps.

2. Abolishing benefits under Sec 88 is going to be a huge blow for Insurance and small-savings agents. Now, the salaried mass will definitely think twice before investing in LIC policy, PPF, NSC, Infrastructure bonds etc.

3. Heard that under 80 L, interest on Savings account balances will also need to be declared and taxed. Waiting for expert opinion and implications on that.

4. As I anyway fall under the highest tax bracket, my only saving grace was the exemption for Interest paid on housing loans. As long as it is retained, my wallet is not burnt too much.

[jaiganes]

scorpio akka!
Does it mean that you are reserving your judgements on the budget.
1. Standard deduction removal is a huge loss for me
2. Section 88 scrapping is big blow for me as I had made investments there and was expecting some tax relief on that this year and the next.
3. Taxing interest on savings account is cruel for me. Coz I dont have the guts to invest in mutual funds and bonds. This means that I will have to invest and I am not comfortable with that idea.
4. Tax on withdrawals above 10000 is too much. That cap could have been one lakh. Assumption that anyone withdrawing 10K is only using it for illegal activity and blackmarket is childish. This will make people use credit cards more and I don't like that idea either.
5. Housing loan principal used to fetch some tax relief, now thats off. coud that mean that banks will start raising interest rates simply to lure customers in the name of increased tax savings? Again implications of which I am unable to fully forsee and comprehend.
I hope someone with better understanding clarifies in this regard and allay my fears.

[Cinefan]

There seems to some ambiguity in the removal of standard deductions as PC has allowed an amount of 1 lakh for savings which will be deducted before calculating tax.My doubt is simple:Suppose the annual income is 5lacs,will the person be taxed for 4lacs or does he /she have to show proof of savings for a lakh to avail this benefit.Also if a guy earns 1.5lacs&he saves a lakh, on what rates will he be taxed :?I think removal of the std deductions will hit people&the other measures will not help.As always it's the salaried middle class whose every penny is accounted for who are being squeezed..Also the decision to slap a 0.01 tax on withdrawals over Rs 10,000 per day thro ATM's or the regular counter in banks is stupid to say the least.This is supposed to stop black money but a lot of genuine people will get double taxed:You are paying tax on your money on which you have already paid tax,what nonsense.To rub salt into the wound,the PM has the gumption to say it will not burden the common man :twisted:
The decision to scrap certain 'sections' will certainly hit people who act as agents&also discourage savings.
:( The exemption limit for women has been raised to 1.25lakh&senior citizens to 1.5 lakh which is a good move but I have some doubts.If a woman earns 1.5 lacs will she be taxed for only Rs 25,000&if yes what's the rate of taxation?The cess on petrol/diesal is very bad as it's a commodity which sees a lot of cesses imposed on it&also fuels inflation.Even if it's a 0.50p tax,it affects prices.Overall it's a bad budget(esp for the salaried).

[scorpio]

JG,

I didn't vote because I want to understand more by reading the morning newspaper. I am reading only bits and pieces on the net and would like to wait. Papers like ET will come up with actual tax calculations to understand the real implication.

Cinefan, I think u should wait for a couple of days, or more, a week when the budget will get dissected by the media to enable easier understanding.

Yes, I too heard about that tax on withdrawal of cash. In my opinion, Rs 10 K a day is too small for money laundering. Probably, PC will revoke it when it comes to actual bill being passed. He can instead think of laying tax on huge deposits of cash into banks which might curb money laundering.

I agree, removing exemptions under sec 88 is cruel but as I am already out of that umbrella, didn't affect me personally. Nevertheless, its impact on other salaried middle class will be really felt. Feel sorry for those Insurance agents who used to chase salaried people around Jan-Feb for investment. :(

[jaiganes]

Cinefan wrote:

My doubt is simple:Suppose the annual income is 5lacs,will the person be taxed for 4lacs or does he /she have to show proof of savings for a lakh to avail this benefit.
I saw Headlines Today programme at 9 o clock. Surjit Bhalla explained this scenario like he would to a 10 year old. The answer for your question is you have to show 1 Lacs savings. The savings figure shown in all TVs are actually assuming 1 lacs of saving. Previously under 88 we used to get 20 % on the investment. But now the whole 1 lac can be invested and will be excluded from Tax. There are 2 possibilities:
1. I can invest the whole sum on one investment and be happy.
or
2. There is a striated cap limit of investment.

More likely that it is scenario 1, which means if i am a low risk investor (or no risk investor) then I put the whole sum of 1 Lac Rs into NSC or ppf.
If I am a moderate risk Investor, I can put the whole sum into LIC with increased returns.
If I am a high risk guy, I can put the whole lot into stocks and bonds.
Again if I am a prudent guy, I would split up my 1 lac and put them in different baskets.
I guess that makes me happy! I can continue with current investments and better still I can increase my investments courtesy removal of sec 88.

scorpio wrote:


Feel sorry for those Insurance agents who used to chase salaried people around Jan-Feb for investment

Read above! They need not despair. In fact they will now chase u till the end of middle earth to invest more than the usual 30 K per year!! :lol:

Yet, things like fringe benefit tax and tax on other perks have to be carefully observed.
One negative that is there is the tax rebate on principal portion of Housing loan still remains.

[Cinefan]

Jai, The information coming in from various quarters also tell the same thing:You can invest to a max of a lakh/year in the way you want ,either split it or put it in one basket,doesn't matter.In fact i intrepet it like this:At the end of the year your total investment(subject to a lakh)is deducted from your income&on that tax is laid,looks pretty simple.

Yes,the insurance agents need not despair,they can now actually ask people to invest more than 30k,if he/she is smart they might get a client to actually put a lakh in insurance. :)

[jaiganes]

Cinefan wote:

if he/she is smart they might get a client to actually put a lakh in insurance.
Yeah! like cinefan!

[Cinefan]

Yeah! like cinefan!

Are you telling I am the client or the smart agent :? :)

[jaiganes]

the former.

[Cinefan]

the former.

Again I am confused,are you telling I am intelligent to invest a lakh in insurance or dumb to do it?Ippadi kelvi kette unna sagadikkapore :D

[Akash]

· Tax bracket altered. Income upto Rs one lakh will be exempt across the board. Income between Rs 1 lakh and Rs 1.5 lakh will attract 10 per cent tax and Rs.1.5 lakh to Rs.2.5 lakh will attract 20 per cent tax. Income beyond Rs 2.5 lakh will be taxed 30 per cent.

· Rs 1 lakh consolidated exemption limit for all tax payers before computing taxable income.

· Women & senior citizens with Rs 1.5 lakh exempted

· Section 88 of IT Act removed No LIC, No ICICI will help now. LLLLLLLLLLLLLLLL

· Corporate Income Tax at 30%, 10% surcharge

· Surcharge on cash withdrawals above Rs 10,000 per day. LLLLLL

· Direct taxes to yield Rs 6,000 crore, indirect taxes revenue-neutral.

· Countervailing duty on IT products proposed. Software exempt from proposed duty

· Branded jewellery gets more expensive with 2% excise duty. Duty on Imitation jewellery down.

· Edible oil & vanaspathi to become cheaper

· Govt will provide Rs 3,644 crore for rehabilitation of tsunami victims

· Cigarettes and tobacco products get more expensive. Bidis spared.

· No customs duty on LPG, kerosene

· Rs 83,000 crore for defence

· Customs duty on textile industry down 20%to 10%

· Customs duty on select capital goods to be below 15%Customs duty on polyester products down 20% to 15%

· Rationalisation of stamp duty proposed

· Tax relief to small scale industries, exemption limit up to Rs 4 crore.

· Subsidy regime to continue.

· Rs 100 crore grant to make Indian Institute of Science, Bangalore, a world-class university.

· High-power committee to make Mumbai a regional financial hub

· Inflation reined in, business confidence restored

· Food-for-work programme in 150 districts

· Allocation for education for 2005-06 will be Rs 18,337 crore

· Industry growth pegged at 8%

· Work on AIIMS-like institutions to begin to promote medical educations

· Budget to focus on growth & job creation

· IT industry to offer 7 million jobs by 2009 WE WILL BE PM SOON MANAGING THESE PPL. JJJJJJJJJJ

· Textile sector to offer 12 million jobs in 5 years

· Fertilizer subsidy to be at Rs 162.54 crore

· 2000 research fellowships for SC/ST students

· Rs 14,379 crores for women's development. All departments to provide gender-based Budgets.

· Rs 3010 crore for mid-day meal scheme

· Special package for Bihar, J&K and North-Eastern states to continue. Rs 7,975 crore grants for Bihar in five years.

· Rs 300 crore for Baglihar project

· Ambitious Bharat Nirman plan to provide rural infrastructure by 2009.

· Budget to support services sector through policy and tax initiatives.

· Rs 630 crore for National horticultural mission, which will be launched on April 1, 2005

· Increase in flow of agricultural credit

· Allocation for Rajiv Gandhi drinking water missionincreased to Rs 4750 crore in 2005-06 from Rs 3300 crore in the current year.

· Accepts report on reforms in Co-operative banking sector

· Govt to promote microfinance and credit linking.

· NGOs, SHGs to become micro-insurance agents.

· Central assistance for recruitment and posting of Urdu teachers in primary and upper primary schools where majority of students speak that language.

· New scheme to revive manufacturing sector with focus on medium and small scale industries.

· Package for handlooms & weaving industry.

· Scheme for revitalisation of sugar factories

· Policy support for pharma and Biotech sectors.

· Equity support to small and medium industries in knowledge sector

· $150 billion export target for 2008-2009

· Govt to explore FDI in new sectors: mining, trade and pensions

· Rs 1,100 crore for rural electrification

· Special-purpose vehicles to finance infrastructure.

· Seeks infrastructure projects for metros, big cities.

· RBI to unveil reforms roadmap for banking sector

· Legal framework for bond trading and securitisation.

· Rs 1400 crore provided for creation of 4000 km of four-lane highways.

· Fiscal deficit target to be achieved. Revenue deficit stands at Rs 95,300 crore. Fiscal deficit at 1.51 lakh crore

· Service tax net widened.

· Twelfth Finance Commissions recommendations would cost the exchequer Rs 26,000 crore in 2005-06. VAT to be implemented from April one, 2005

[scorpio]

Yeah JG,

I stand corrected. Do you have any idea of what investments are being covered under sec 80 C which is being brought in to replace Sec 88??

If I have a SB balance of 1 lac, will they consider it and give me 1 lac exemption??

Today's 'The Hindu' has a column tht says the net tax outflow of salaried class across all levels only comes down , thanks to budget, but did not explain in great detail 'how' ?

[Cinefan]

Akash,When did you become a business magazine reporter,ippadi info kuduthirikkenga? :)

[Cinefan]

Today's 'The Hindu' has a column tht says the net tax outflow of salaried class across all levels only comes down , thanks to budget, but did not explain in great detail 'how' ?

The New Indian express-Bangalore shows 'how'?I will try to give you the link.

[jaiganes]

Scorpio wrote:

If I have a SB balance of 1 lac, will they consider it and give me 1 lac exemption??

I think that would not be on cards. SB is not an investment. I guess anything that has a term date, maturity value and interest accrual would qualify as investment of savings. It is a misnomer to call it savings, the right term should be 1 Lakh Rupees of investments if present will act as your savings from the Tax man. Else he gets 30 % of what you haven't invested from the 1 lakh. This is what I understood. The whole idea is to make the salaried class hold more money which will get into market for circulation. this will increase 'liquidity' and prevent cash crunch. Now this will spare the govt from printing more notes and coins thereby indirectly saving more money for the exchequer. This is the cycle as I understood it. Its effects are positive, both for the macro economy and the micro economy. The risk for individuals is now they are forced to look deeper into investing as the returns on a sum of 1 lakh will appear more enticing (awakening the avarice which is in deep slumber in ppl like me).

[Akash]

· Section 88 of IT Act removed No LIC, No ICICI will help now.

They should have given me a hind about this, atleast some months b4
:x :x

· Women & senior citizens with Rs 1.5 lakh exempted
:evil:

· Edible oil & vanaspathi to become
They assume, there are less Fatty ppl in INDIA, huh??

· Cigarettes and tobacco products get more expensive. Bidis spared.
When a guy not bothered about Rs.28/- for nothing, 2 more Rs. wont bother him!!

· IT industry to offer 7 million jobs by 2009 WE WILL BE PM SOON MANAGING THESE PPL!!
So how many Future - Manager of Managers around??

· Special-purpose vehicles to finance infrastructure.
what shall we choose? Endavour or CRV?? Scorpio, Safari looks cheap na!!

[jaiganes]

akash! I think you are mistaken as far as the LIC investments under sec 88 go. It is the slab of 30 K + 70 K which sec 88 advocated that has been removed. Otherwise all the investments are brought under the 1 Lakh Savings investment slab (common and consolidated).

[Akash]

jg, your rescued me out of my SHOCK :roll:

[jaiganes]

I have scheduled a call with my family tax consultant.
I will come back with more inputs on the same.

[scorpio]

Have pasted the mail I recd. this morning from our company's tax consultant. Good one with reasons for all of us to smile! :D

First of all, v need to thank our FM for a great budget he has given the salaried class. Theres a great deal of reduced taxes for all of us.

First of all taxes, Its simple now
Upto 1,00,000 - Nil
>From 1,00,001 to 1.5L - 10%
from 1,51,001 - 2.5L - 20%
above 2.5L - 30%

This means a lot of savings to all of you. Though the standard deduction has been removed, the restated tax rates means your taxes for next year has gone down significantly.

But there's more goodies for u. All the rebates under section 88 like Lif insurance premium paid, EPF/PPF contributions, housing loan principal repayment vl now be as a deduction from your taxable income upto Rs 1,00,000.

Lets c how it works. Earlier if u invest 70,000 in NSC/EPF/LIC and 30,000 in ICICI bonds, you were eligible for a rebate from tax as follows

1. 20% if ur salary <1.5 laks
2. 15% if ur sal is btn 1.5L - 5L
3.Nil if ur salary was above 5 L

Now, the scenario is different. If u invest Rs1,00,000 similarly, U can deduct Rs 1,00,000 invested from ur total income itself. That means, if your income is 2Lakhs income and u invest 1Lakh, then ur tax liability is Zero. Howzzat ?

Its more sweeter for those whose taxable income is above 5Lakhs. From earlier rebate of Rs 0, u straight away gain Rs 30,000 as deduction of Rs 1,00,000 the above specified investment is available for all the tax payers.

For those of you who have a housing loan it means lot. Earlier only 20,000 repaid as principal was available as rebate, now there is no limit, u can repay principal upto Rs. 1 lakh. Plus 1.5lakh on Interest is kept intact.

For those who want to invest in Equity linked MF, u can now invest as much as u want upto Rs 1,00,000 from earlier Rs 10,000

What do you need to do now ? simple invest where returns are high and tax free. Increase ur PF contribution to 15% from current 12%, u can voluntarily contribute more. Simply bcoz it earns 9.5% tax free returns, go ahead and do it now if u havent done it so far

Take more LIC policies. It gives u insurance plus the redemption is tax free. Please and please dont take Unit Linked policies, they are simply useless. Dont mingle insurance with stock market investment. If u want to make money in stocks, u can make it thru directly investing, u dont need to play with insurance. I am always there to manage ur funds.

Invest in Tax Saving Mutual funds regularly say Rs1000 a month.

Stop investing in NSCs. Interest on NSC in not exempt as 80L as been withdrawn.

If u have invested in 80CCC (Pension Fund) upto Rs 10,000 please dont increase it. B'coz its become useless due to changed provisions of Income Tax. Under the policy, the pension which u are going to receive vl b taxed in your hands. So its better off u pay Life insurance premium or PPF so that at the time of withdrawl these are tax free.

[jaiganes]

scorpio !
Thanks for the post.
Regarding pension investments, I am a little confused. I read this article in rediff (http://in.rediff.com/money/2005/mar/01bud2.htm) and I am confused now. Anyways as you put it VPF Voluntary PF contribution seems to be a good one as 9.5% is a good rate and as long as communists are there around, I will keep it. Later I can move it to LICs. NSC anyway is a dud. Thanks for the detailed posting. Good budget indeed for the salaried. But FIIs are irritated that no new disinvestment and privatisation initiatives are announced for this year. Also FM once again has not belled the cat namely reforming and monitoring the delivery mechanisms that are going to take all those huge allottments in the social sector to the citizen. Let us wait and watch.

[lordstanher]

Cigarettes and tobacco products get more expensive. Bidis spared.

Huh?? :shock: How come?? Bidis actually outsell cigarettes in India 4:1! So the former shudn't hav been exempted! :evil:

[jaiganes]

Simple politics buddy!
Remember it is common man's budget.
bidi is for common man so it is spared,
Cigarettes are for un common man!! :lol:
Jokes apart, bidi making is a cottage industry in our country and it employs millions in the unorganized labour sector. Touch there! get burnt is the politico-economic lesson our FMs have learnt.
Also bidi is one of the stuff that India exports!!! Israeli army is a major consumer of Indian beedis. howzzat!

[Badri]

I saw this article in rediff...maybe you've all already seen it, but it presented a very layman view of what taxes we will be paying next year..do take a look

http://in.rediff.com/getahead/2005/mar/02tax.htm

[lordstanher]

Simple politics buddy!
Remember it is common man's budget.
bidi is for common man so it is spared,
Cigarettes are for un common man!! :lol:

Well in tat case, shudn't they hav slapped an excise on alcohol as well....?? even tats 4 the 'un-common man' :wink:

[jaiganes]

Maybe, our friendly brewers paid PC a friendly visit!!
jokes apart, Alcohol doesn't have a country counterpart on an industrial scale employing millions.