Budget 2011-12: Tax concessions top common man's wish list
February, 28th 2011
Will the finance minister play the Santa this time? Thats the question that will be uppermost on the minds of taxpayers as the finance minister begins presenting the Union Budget. One cant blame them, though. Considering that the cost of living has literally gone through the roof, they really need some sops from the finance minister to stay afloat. However, the answer to the question depends on the person you are asking and his or her perception of the government. Those who believe that the government is in a comatose mode say they dont expect much from the budget.
However, those who see the government in a damagecontrolling mode say it may take steps to mitigate the sufferings of the so-called aam admi who is reeling under the inflationary pressure. And no wonder, most of them believe that the government is likely to offer some tax relief to the common man to put some money back into his pocket. There is a widespread belief that the government may tinker the in-come tax rate or slabs a bit so that people would get a relief from high inflation.
The hope is reinforced because DTC is just a year away, says a private wealth manager, who doesnt want to be quoted. In anticipation of DTC, lots of people believe that the tax slab may be enhanced from the current levels or a lower rate of tax may be extended to the higher bracket, says D Sundrarajan, investment consultant, Trendy Investments. The Budget 2011 is expected to be transitional in nature which would pave the way forward for the implementation of the Direct Taxes Code (DTC) proposed to be effective from April 1, 2012. Given the economic and political compulsions, certain wideranging relief, particularly for the lower and middle income groups, is inevitable, says Suresh Surana, founder, RSM Astute Consulting Group.
According to him, with the general inflation rate hovering at around 8-9 % and food inflation of around 15%, the government is likely to increase the basic exemption limit from the current Rs 1.6 lakh to Rs 2 lakh to mitigate inflationary pressures and remain consistent with the proposed DTC. Also, the education cess of 3% is expected to be abolished. This will result in a tax-saving of at least Rs 4,000 for all taxpayers with a tax-able income of Rs 2 lakh and above.
The basic exemption limits for women and senior citizens are likely to be correspondingly increased, adds Surana. Housing is another area where the common man des-perately needs the healing touch. With rise in inflation, the cost of houses has increased and with the increase in the interest rates on housing loans, the limit of deduction for interest on housing loan should also be increased. This will not only benefit the house occupants, but will also trigger fresh demand for housing, which will benefit the real estate sector, says Pranay Bhati, associate partner, Economics Law Practice.
Interest on housing loans is deductible under Section 24 of the Income Tax Act up to Rs 1.5 lakh. Gaurav Mashruwala, a certified financial planner , also hopes the government takes some action in this regard. Even if a person takes a Rs -20 lakh loan, his interest would come to close to Rs 2 lakh.
Where do you get houses for Rs 15 or Rs 16 lakh? I sincerely hope the government will increase tax exemption on interest on housing loan, he says. However, Harsh Roongta, CEO, apnapaisa, a financial portal, says the government is unlikely to provide any relief in the regard. If at all there is any sop for the sector, it will be given directly to the housing industry, he says. Experts believe that if the government manages to get on with the pending reform process it will lift sentiment in the stock market.
Whatever is good for the overall economy is good for the market and individual investors, says Navneet Munot, CIO, SBI Mutual Fund. If the government makes any progress on pending issues like GST, FDI cap in crucial sectors and implementation of DTC and so on, it will definitely help the market, he adds. His pet wish: the government should continue to offer sops to investors in ELSS (equity-linked saving schemes or tax schemes from mutual funds). However, according to Morgan Stanley Research Strategist, Ridham Desai, History does not favour the market in the 3-4 weeks following the budget.
The markets are usually flat in the month ahead of the budget and, in two out of three years, fall in the month following it. In the past 15 years, the market has been positive in the following years: 1997, 1999, 2004, 2006, 2009 and 2010 there does not seem to a great correlation between market performance and a market-friendly budget. We continue to be buyers of Indian equities . That was for the wish list, which may or may not come true. But what are advisors telling their clients to do just prior to the budget? We are asking our clients to do some re-allocation within the fixed income portfolio.
Since the interest rates have gone up on bank fixed deposits and bonds such as the one issued by SBI, we are asking clients to take out money from PPF, post office schemes, senior citizens scheme and so on, he says. Even if one pays tax on interest income, bank FDs can give you more returns, he says. As for making changes in strategy in anticipation of change of provisions in the budget, Sundararajan says it could backfire. You cant make changes in your strategy based on the likely changes (in the budget). If there is a significant change in tax provision like Secion 80C, captial gains, DTC provision, etc, that will have a huge impact on your investment decision and financial planning. Otherwise, budget wont have a lasting impact , he adds.