More taxes, additional deductions but no impact on investments

There were huge expectations from the first full-fledged budget of National Democratic Alliance after coming to power last year.  In this post, we shall review the measures proposed in the budget which shall have impact on individual tax payers and their investments.

Major revenue booster

One of the measures having significant impact on the revenue collection is additional surcharge of 2% over and above existing 10% surcharge for individuals having taxable income of more than Rs. 1 crore.  This additional surcharge is in response of abolition of wealth tax.  While the abolition of wealth tax was a long pending demand, 2% additional surcharge shall more than compensate any loss to the exchequer on account of wealth tax abolition.  To quantify, wealth tax generated revenues of Rs. 844 crores in FY 2012-13, whereas 2% additional surcharge on all taxpayers (including domestic companies) is estimated to generate Rs. 9,000 crores to the government.

Effective rate for service tax has been increased from 12.36% to 14%.  There is also an enabling provision in the budget to allow Government to levy additional surcharge of 2% to achieve Swachh Bharat objectives.  Excise duties are ‘rationalized’ by increasing it moderately from 12.36% to 12.5%.  These changes in service tax and excise duties shall make almost all the things under the sun dearer.

Surcharge on dividend distribution tax on dividend received from debt funds has been increased from 10% to 12%.  Thus the effective DDT rates for retail investors in debt funds shall marginally increased to 28.84% from existing 28.352%.  

Correcting loopholes

Another measure which has missed the limelight of the media is TDS on deposits with banks. Currently Rs. 10,000 threshold for determining whether TDS is to be deducted was applied on each branch of the bank.  Thus if an individual had fixed deposits in two branches of the same bank earning total interest of more than Rs. 10,000, however the interest earned in each of the individual branch was less than Rs. 10,000, TDS was not required to be deducted.  This loophole has been rectified.  Now, the threshold interest amount shall be determined at bank level instead of branch level.  This is applicable for all banks following core banking solutions (who doesn’t nowadays?) and is effective from 1^st June 2015.

Increased and new deductions

These primarily relates to health related expenditures and can be best explained by way of following table:

Expenditure incurred on	Self and Family (spouse and dependent children)	Parent
A.      Medical premium	Rs. 25,000	Rs. 25,000 (if Senior citizen – aged 60  years and above, then Rs. 30,000)
B.      Medical Expenditure in case of very senior citizen (aged 80 years and above) provided such citizen is not covered under any medical insurance plan	Rs. 30,000	Rs. 30,000
C.      Total Deduction under A and B capped at	Rs. 30,000	Rs. 30,000

Further limits for few other deductions is increased.  Now individuals can claim deductions to the extent of Rs. 40,000 for certain chronic diseases such as cancer, aids, etc.  In case such expenditure is for senior citizen (self or dependent relative), the deduction is Rs. 60,000 and for very senior citizen, it shall be Rs. 80,000.

One important hidden change is deleting the requirement for providing certificate in prescribed form from the specialist doctor working in Government hospital to claim this deduction.  Now a prescription from a specialist doctor for medical treatment shall be sufficient document to claim this deduction.  This shall certainly lessen the hardship for individuals.

Deductions with respect to medical expenditure for persons with disability has been increased from Rs. 50,000 to Rs. 75,000 and persons with severe disability has been increased from Rs. 1,00,000 to Rs. 1,25,000.

Deduction on account of payment made to LIC or other insurers for annuity plan has been enhanced from existing Rs. 1,00,000 to Rs. 1,50,000.  However this is within the overall limit of Rs. 1,50,000 and may not benefit individuals if they are exhausting their limits by other means such as insurance premium, PPF deposits, etc.

Additional deduction of Rs. 50,000 over and above existing deduction of Rs. 1,00,000 is proposed for contributions made by an individual to a notified pension scheme.  This is aimed at to boost NPS as well as encourage additional investments for retirement benefits.

Further the recently introduced Sukanya Samriddhi Account Scheme by Prime Minister Narendra Modi got a boost by including any investments into that scheme eligible for deduction under Section 80C within the overall limits of Rs. 1,50,000.  Further any interest accrued on such deposits as well as withdrawals in accordance with the scheme shall be exempt from tax.

Another pet project of the Prime Minister, Swachh Bharat, got its mention in the budget.  Any donations made to Swachh Bharat Mission as well as Clean Ganga fund shall be eligible for 100% deduction.  This is applicable retrospectively from 1^st April 2014. 

There is some reference to flexibility for employees to choose between employee provident fund and national pension scheme and exemption from contribution to EPF for employees below a certain threshold of monthly income.  However, there is not much clarity at this point of time on how this will be implemented and administered.

Bachhat’s take

Overall, things change a little for individual taxpayers in this budget.  There shall be lesser savings on account of rise in overall expenditures by way of excise and service tax hikes, but additional deductions can be claimed on account of certain expenses like health related and investments like NPS and Sukanya Samriddhi.  There is no change in slab rates, basic exemption limits, and capital gain tax.  From personal finance point of view, no need to review your existing investments and no game changer.  But hey, it was not expected to be!!!

Do pour in your comments on the budget.

Updated for DDT on debt funds and EPF / NPS portability.

Best 5 Year Tax Saving Fixed Deposits

It is the season of planning your tax related investments and most of you shall be busy in identifying where to invest and which insurance policy to purchase.

One of the instrument which gives benefit under Section 80C of the Income Tax Act is 5 year tax saving fixed deposit.  Many find this a good instrument against other available options, since this is risk-free investment.

To enable you to choose the best 5 year tax saving fixed deposit on offer, Bachhat has updated its page on interest rates offered by banks on fixed deposits.  One can have a look at it here.

List of banks offering best rates on 5 year tax saving fixed deposit:

Banks	Interest Rates
Dhanlaxmi Bank	10.10
Oriental Bank of Commerce	9.75
Tamilnad Mercantile Bank	9.75
City Union Bank	9.50
IDBI Bank	9.50
Karnataka Bank	9.50
State Bank of Bikaner & Jaipur	9.50
State Bank of Travancore	9.50

How your secured savings landscape is bound to changed?

• Interest rates on Public Provident Fund to be linked to the market yields on government securities of comparable maturity, 
• Annual reset of interest rates of NSC, PPF, etc and 
• Discontinuation of Kisan Vikas Patra instruments.    

These and many other recommendations shall become reality if the Government accepts the last week’s report of the committee headed by Smt. Shyamala Gopinath, Deputy Governor of Reserve Bank of India.  The committee was formed to recommend reforms required in overall administration of National Small Savings Fund (NSSF). 

Following are the small savings schemes covered under NSSF and on which the recommendations are made in the report:

Schemes / Rules	Implementing Agency
Post Office Savings Account	Post Offices
Post Office Time Deposit – 1, 2, 3 and 5 years	Post Offices
Post Office Recurring Deposit	Post Offices
Post Office Monthly Income Account (MIS)	Post Offices
Senior Citizen Savings Schemes (SCSS)	Post Offices and designated branches of public sector bank
Kisan Vikas Patra (KVP)	Post Offices
National Savings Certificate (VIII Issue) (NSC)	Post Offices
Public Provident Fund (PPF)	Post Offices and designated branches of public sector bank

 Source: Committee Report

The report acknowledges the importance of small saving schemes:

"Small Saving schemes have been always an important source of household savings in India. Although these instruments are technically not Government Securities and do not have any explicit Government guarantee, their legacy has given them characteristic of being equivalent to that of a Sovereign liability.  These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument.  At the same time, these instruments have been treated as a means of providing social benefit to the small savers."

Hence the benefits these schemes provide to various sections of the population especially small savers are beyond doubt.  In this article, Bachhat list downs key recommendations made by the committee which directly impacts the investors.

Changes in interest rates:

One of the key recommendations of the committee relates to the interest rates.  The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on Central government securities of comparable maturities and should be reset yearly.  It means that as the interest rates of government securities rises, the interest on these securities shall also increase and vice versa. 

The committee has; depending on the instrument, its liquidity and its tenure; also recommended a spread of minimum 25 basis points (bps) vis-à-vis government securities of comparable maturities. 100 bps is equal to 1 percentage point.  The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps).  For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%.

Further, to avoid year-on-year volatility, cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins.  These rates shall be fixed in advance and shall be known before the start of the financial year.

Committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%.  Further, the interest should be calculated on a daily basis on such deposits.

Other Recommendations:

1.     Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.

2.     Abolition of 5% maturity bonus on Monthly Income Scheme and reduction in tenure from 6 years to 5 years.

3.     Increase in annual investment limit for PPF to Rs. 1 lakh.  To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).

4.     NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates.  No income tax exemption under Section 80C on accrued interest from NSC.

5.     The committee has also recommended reduction in commission paid to agents for the products sold.  The table below gives the existing and the proposed commission structure.  This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them.

Schemes	Existing Commission %	Proposed Commission %
Kisan Vikas Patra	1	0.5
Post Office MIS	1	0.5
Post Office Time Deposits	1	0.5
National Savings Certificates	1	0.5
Senior Citizen Savings Schemes	0.5	NIL
PPF	1	NIL
Post Office Recurring Deposits	4	Reduce 1% p.a. for 3 years. 1% thereafter.

Source: Committee Report

Effect on the current interest rates

Assuming that the Government accepts these proposals and implements the same with effect from 1^st July 2011, the revised administered interest rates based on above recommendations shall be as follows:

Administered Interest Rates for July 1, 2011 to March 31, 2012

Instrument	Current Rate (%)	Proposed Rate (%)
Savings Deposits	3.50	4.00
1 Year Time Deposits	6.25	6.80
2 Year Time Deposits	6.50	7.20
3 Year Time Deposits	7.25	7.50
5 Year Time Deposits	7.50	8.00
5 Year Recurring Deposits	7.50	8.00
5 Year SCSS	9.00	8.70
5 Year MIS	8.00 (6 yr MIS)	8.00
5 Year NSC	8.00 (6 yr NSC)	8.00
10 Year NSC	New instrument	8.40
PPF	8.00	8.20

Source: Committee Report

Bachhat’s take

Above recommendations, if implemented, will have long term impact on the way individuals save.  For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings.  Reduction in agency commission will ensure that products are sold to investors on the basis of their merits.  Though these recommendations shall bring year-on -year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability. 

Do you agree with the recommendations made in this report?  Do share your views and suggestions on this article in the comment section below.