How are budget announcements going to impact your investments?


Budget impact investments, value most for all of us. It is true that every individual saves so as to protect their future. Be it a simple housewife, a salaried person or someone involved in some kind of business. These savings canalize mainly into few investment instruments like banks fixed deposits, post office deposits and etc. Other investments which are quite popular are mutual funds schemes, various insurance products, and pension funds. Moreover, these investments are irrespective of the level of one’s income. A person who earns Rs.10000 in a month also does savings and persons whose income is over Rs.1 lac a month also does savings.

Analyzing budget 2018-19 impact on your personal finances 

From the individual perspectives union budget, 2018-19 have a dual effect. On the one hand, it hit the take-home money while on the other it also bears upon your investments.  In case of take-home money, there is not much change. Income tax slab remaining unchanged, the two important alterations includes – 

  • Removal of medical and transport allowance and reintroduction of standard deduction
  • Hike in cess on income tax by 4%

While when it comes to investments, the budget impact is to some extent on the larger side.  The changes that are going to affect not only your current and past investments but is going to impact all future investments. These changes are –

  • Introduction of long-term capital gain @10% on stock market and mutual fund investments
  • Insertion of dividend distribution tax @10% on equity mutual funds
  • Relief to employees under national pension scheme
  • Sops for senior citizens which includes –
    • Increasing deduction limits on health insurance and medical treatments
    • Rising deduction limits on medical treatment for specified ailments
    • Increase in deduction limits on interests from banks, post office, including FD interest

In rest of the blog, I will cover in details how these changes are going to impact your own personal finance along with investments.

Replacement of medical and transport allowance with reintroducing standard deduction, beneficial to taxpayers

From 01 April 2019, salaried employee, in both public and private sector, is allowed for availing a standard deduction of INR 40000 from their gross salary. This deduction reintroduced in the budget 2018-19 in lieu of transport and medical allowances.

Until 2006, there were provisions of standard deductions. At that time on a gross salary of INR 5 lacs, INR 30000 or 40% of gross salary, whichever is less was allowed as standard deduction. On a gross salary of above INR 5 lac, this deduction was a flat INR 20000.

However, it was removed and employees were allowed to claim medical and transport allowance for tax exemption. A claim of INR 19200 towards transport and INR 15000 towards medical reimbursement is there. This total benefit amounts to INR 34200. But now it will in form of standard deduction of INR 40000, a gain of INR 5800.

budget impact investments - standard deduction replaced medical allowance

Do you think that reintroduction of standard deductions in lieu of medical reimbursement and conveyance allowance had benefited us? So, in order to understand it, I am taking a hypothetical example. Suppose an individual has a gross salary income of INR 5.35 lacs in current FY2017-18. And I assume that his salary remains same next year as well.In order to show the impact of the reintroduction of standard deductions, I calculated his total tax payable for both FY2017-18 and FY 2018-19.  This is shown in the following table. For simplicity, I did not take any other benefits under the existing income tax act.

budget impact investments - tax saving after reintroduction of standard deviation

On the gross salary of INR 5.35 lacs, a net tax saving of INR 7345 is there. This is a case where the individual falls under 5% as well as 20% tax slab. Thus, by increasing INR 5800 from earlier similar deductions in the budget, you get INR 7345 tax benefits.

Why need every taxpayer not be happy with a standard deduction?

budget impact investments - taxes and deductions

The above illustration suggests that the reintroduction of standard deduction is beneficial to salaried taxpayers. However, this is not the truth for every individual salaried who pay tax. Those taxpayers who are in higher tax brackets of 20% and 30% did not in any way benefited from this reintroduction. Moreover, the net tax effect is also negligible to a larger section of taxpayers. But yes, only those taxpayers got some benefit out of this is the one who comes marginally under 20% tax brackets.

Increased burden on honest taxpayers due to hike in cess by 4%

From 01 April 2018, every taxpayer will be charged 4% health and education cess. Before that, there is provision for 3% of education cess. This 4% cess is applicable to taxable income including surcharge. This is 1% additional burden or every honest taxpayer and the net effect on the tax rate for every category of taxpayers is shown in the following table.

budget impact investments - monetary impact of 4% cess hike


Moreover, with the money collected from them is proposed to be used for those who are not even in the tax brackets, willingly or unwillingly. The honorable taxpayers are not going to even benefit from this additional burden for a single penny.  Thus, it might be that almost all honest taxpayer considers it as an additional burden on their pockets.

Is taxing long-term investors @10% as capital gain a good idea?

Why does Indian saves and invest those savings? I am not sure, but the most common answer which I think we get is for future. The very next natural question is, whose future? The answer to this is the beautiful Greek proverb.

budget impact investments - long term capital gain


Any person who is so aware that he/she saves and put those savings somewhere safe enough is not for self-consumption but is for their near and dear’s future. And, if he takes courage to invest in mutual funds and shares, he must get a reward for taking such high-risk.

Yes, investment in stocks and MFs are the riskiest investment. This risk is rewarded in the form of high profit. But the question is how much? In most cases, the losses are high compared to overall profit.

Now, taxing profits from these investments for retail investors is a justified move or not, is out of the scope of the current blog. And I relay completely on reader’s view on this. Meanwhile, it is now a reality that government had taken decision for taxing such profits. Retail investors are those who earn their livings either by doing some job or business. And for which they already pay taxes either through personal income tax or business taxes and others.

First, do hard work and earn, then pay tax before you use those earnings. After that, if by mistake you take the risk to save some from those left over and foolishly act canalizing those savings in nation-building through investing in instrument meant for that purpose, you will get penalized. Penalize in the sense that after taking such high risk you get lucky enough to earn some profit you again need to pay taxes. In place of getting rewarded for such nation-building contribution, the honest taxpayer gets double taxed.

What you need to know about long-term capital gain @10% on your stock market and mutual fund investments 

budget impact investments - impact of long term capital gain (LTCG) on equity market

From 01 April 2018 investors of shares and mutual funds need to pay tax on gains for remaining invested as long-term @10%. For taxation purpose holding over 12 months is considered a long-term investment. However, if you sell your holdings that has been held for more than a year on or before 31 March 2018, you do not need to pay tax. Also, this tax is applicable only if long-term capital gain (LTCG) is above Rs.1 lac in any financial year.

Further, LTCG tax is to be calculated on the basis of the cost of acquisition or closing price on January 31, 2018, whichever is higher. Take the example of a stock. For example, stock purchased on February 1, 2016, for Rs.100, which closed at Rs.200 on January 31, 2018. If sold after March 31, LTCG tax will be calculated based on the closing price of January 31, which is higher. Income tax department has also released frequently asked questions with answers on LTCG. You can download the PDF here.

Following is taxability of LTCG in various scenarios.

budget impact investments - calculation of long term capital gain (LTCG) on equity market

Dividend distribution tax @10% on equity mutual funds an additional pain for long-term investors

The government has introduced dividend distribution tax (DDT) on mutual funds schemes that invest primarily in equity. Its rate is proposed to be 10%. Till now DDT is applicable on all dividend paid by non-equity mutual funds. Non-equity MFs include money market, liquid, and debt funds and etc. Investments less than 65% of the total corpus in equity are categorized as non-equity funds for taxation purpose.

These non-equity MFs currently pay tax on dividends at 25% rate. They also have to pay 12% surcharge and 3 % cess which total to 28.84%. Now due to increase in cess, these funds effective tax liability on dividends comes around 29.12%. In a similar way, effective tax liability on equity-based MFs amounts to 11.64%.

budget impact investments - dividend distribution tax (DDT) on equity mutual funds

The funds declare dividends to its unitholders from realized profits. They make the profit by selling instruments at a price higher than the purchase price. Even in case of securities receive dividend or interest results in profit. Please note that DDT is paid directly by mutual fund house before crediting it to investors account. Dividends are completely tax-free in the hands of MFs unitholders.

Good. Retail investor does not have to pay any additional tax on such dividend receipts. But is it a reason to smile? Hopefully no because this impact adversely to such retail investor. Don’t smile! the mutual fund is going to adjust tax amount before declaring dividends. Certainly, the amount of dividend is going to reduce at your hand. You will have to reconsider investment strategies. Whether to opt for dividend payout option or to opt for growth option needs to be scrutinized. Even in case of growth option with systematic withdrawal plan (SWP), for regular income get hurts. The gains in SWP is taxed.

Non-salaried to be treated at par with salaried under NPS

From 01 April 2019, the non-salaried will be at par with salaried NPS subscribers. NPS stands for the national pension scheme. Now like salaried, non-salaried can also withdraw up to 40% of the total NPS corpus and it will be tax-free. Maximum permissible withdrawal (on closure or opting out) is 60% of the corpus.

Let us understand this with a hypothetical illustration. Suppose, a self-employed individual has Rs.10 lacs lying in his NPS account at the time of its maturity. He can withdraw 60% of the corpus, i.e. Rs.6 Lacs. The remaining Rs.4 lacs is to buy an annuity and get a pension every month.

Now, for the Rs.6 lacs withdrawn, 40% of the total (NPS) corpus is tax-free, for all. This amounts to Rs.4 lacs which will be tax-free and not full Rs.6 Lacs. For the balance (Rs.6 lacs – Rs.4 lacs) Rs.2 lacs of the amount withdrawn, he will need to pay taxes.

Who in actual these senior citizens are, that have caught FM’s attention so much?

budget impact investments - senior citizens budget sops

A person attaining the age of 60 years qualifies as a senior citizen in India. This is the age of official retirement from government services as well. Almost all private sector also follows same for retirement age in India.

First, let us look at a very interesting and latest data provided by income tax department for FY 2016-17. The effective direct taxpayers at the end of March 2017 is 8.27 Cr and the total population in 2017 was roughly around 134.3 Cr. This gives an estimate of the effective direct taxpayer in India and yes it is 6.16% of total population.

Further, out of total taxpayers, provisional individual taxpayers for FY 2016-17 is 5.93 Cr. Out of this, 1.89 Cr is salaried taxpayers, 1.88 Cr individual business taxpayers and remaining 2.16 Cr are others whose tax has been deducted at source from their income but the taxpayers have not filed the return of income.

Now provisional gross total direct tax collection without refund claim for FY 2016-17 stands at INR 1012506 Cr. And net direct tax collection after the refunded claim is INR 849818 Cr. Out of this 41.40% is collected as personal income tax i.e., INR 349270 Cr. Salaried employees contributed roughly 41.23%, individual business owners 13.74% and those whose TDS was deducted but hadn’t filed the return or claimed the refund is 45.03% of the total provisional direct tax collected under the personal income tax.

Budget impact investments - Breakup-of-India-Total-Population-between-tax-payer-and-non-taxpayers-2017

Now for the tax department, senior citizens are those whose refund claim indulges maximum paperwork, besides other refund claimants.

Does concession announced in budget 2018 for senior citizen’s matter?

The above data on personal income tax return filed by individual taxpayers also hints that majority of senior citizens must have retired from salaried class. They also mainly rely on interest income besides pension.

Majority of salaried taxpayers either fall in 5% tax brackets and next to it, is in 20% tax brackets. However, the quantum who falls under 20% is quite low as compared to 5% tax brackets. And it is least in case of 30% tax brackets. With this logic, the majority of senior citizens came from either 5% or 20% tax brackets.

And it is no wonder that most of these tax payer’s investment is much enough, that they claim the full refund of their TDS on investments. This really might be the big burden on government employees. Thus, the government might not be earning from this major chunk of taxpayers. So to ease-out the additional burden on tax department, the rebate is only for this segment of taxpayers. No loss in overall tax collection with this on one hand and showoff by the government initiative on false affection towards senior citizens.

This rebate from 10k to 50k only to senior citizens is a win-win situation for the ruling party at center but actual benefits to these categories of citizens hardly matter!!!

Budget impact investments - Senior-citizens-sops-in-budget-2018


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