How to boost your savings kitty

The Union Budget, despite being constrained by a high fiscal deficit, gave some relief to the Rs 3-8 lakh income group.

In simple numbers, a single-income household earning of Rs 10 lakh a year will now save around Rs 4,300 per month (Rs 51,500 a year). Add another Rs 20,000 investment in infrastructure bonds under Section 80CCF and there is a tax saving of another Rs 6,180 per year.

And he has attained this by retaining the basic exemption limit for all categories, but increasing the income tax slabs. The 10 per cent rate will now be applicable for the Rs 1.6 - 5 lakh income bracket. Earlier, it used to be for incomes between Rs 1.6-3 lakh. This means the taxpayer will save Rs 20,600 for incomes up to Rs 5 lakh.

The 20 per cent tax rate will be applicable for incomes between Rs 5-8 lakh instead of Rs 3-5 lakh. And the highest income tax rate of 30 per cent will be applicable on incomes over Rs 8 lakh, which was earlier applicable to incomes over Rs 5 lakh.

Financial planners said that the savings due the Union Budget proposals should be used by people to bolster their savings kitty or reduce loan burden.

"Instead of blowing this surplus, people should part-prepay their credit card bills or personal loans," said Kartik Varma, co-founder, iTrust Financial Advisors.  These loans are among the most expensive, in terms of interest rates. For instance, credit card companies charge more than 40 per cent annually.

Also, ones who do not have much medical insurance should use this opportunity to purchase a medical insurance policy or save through systematic investment plan of mutual funds.

As far as the 80CCF benefit goes, one should look at the rates of interest on offer before taking a call. The government has not given any indication about the institutions who will issue these infrastructure bonds.

However, experts said that the rates of interest may not be too high – around 5.5 to 6 per cent. Reason: These bonds are not competing with any other instruments in the market. "Since it is not a compulsion but an option that will provide you additional tax benefits (if you choose to invest), institutions issuing these instruments will not be under any pressure to offer competitive rates of returns," said another financial planner.

Among other important benefits in the Union Budget, small businesses and professionals have given further leeway by hiking their audit compliance limit. According to the new provisions, small businesses will have to conduct account audits if there turnover is Rs 60 lakh (earlier Rs 40 lakh). The limit for professionals has been hiked to Rs 15 lakh (Rs 10 lakh). This will reduce the burden of tax compliance on the small enterprises.

The Finance Minister in the Budget speech said, "I, as Finance Minister, had introduced these limits in my budget of 1984. It is high time to reduce the compliance burden on small taxpayers."

More importantly, in many cases due to small operation of the businesses, the cost of audit compliance is more than the tax liability which does not make much sense. Typically, an audit compliance cost in such cases could be in the range of about Rs 10,000-30,000 per year depending on the nature of the business.

Also, besides contributions to health insurance schemes which is currently allowed deduction under the I-T Act, the Central Government Health Schemes (CGHS) will also be allowed deduction under the same section. "There are individuals who contributed to the CGHS without any tax benefit. This will beneficial for them," said Varma.

The interest subsidy of 1 per cent on loans for purchase of houses for less than Rs 20 lakh has been extended till 2011, as against Rs 10 lakh which was to expire by this financial year-end. However, experts are divided on whether the extension of the scheme will cover the existing homeowners or is applicable only to fresh applicants. Pranay Vakil, Chairman, Knight Frank, said, "There will be a saving of Rs 800 per month for the consumer."

But gains from these measures are going to offset by indirect taxes. For one, the excise duty on fuel prices will reduce the impact of direct tax reliefs. The excise duty on petrol and diesel has been increased by Re 1 per litre – a move that saw the Opposition staging a walkout.

The duty rates on branded petrol and diesel is hiked too. They will be expensive by Rs 14.35  petrol)and Rs 4.60 (diesel) per litre. On unbranded products, this will be Rs 15.50 and Rs 5.75 per litre. "This hike will adversely impact the transportation cost for those who own their own vehicle," said Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers.

Also, there will be a hike in the hospitalisation costs as well as insurance premiums. This is due to introduction of the service tax of 10.3 per cent on hospitals for cashless settlements.

The budget has provided few reliefs on the indirect tax front as well. The Finance Minister has cut customs duty on a few spices and given service tax exemptions on transportation of cereals and pulses by road. Also, there is an indirect duty cut benefits to components of consumer durables like water filters and microwave ovens.

But this will not have any major effect as it will be offset by the increase fuel prices, according to tax experts. Anil Rego, CEO, Right Horizons said, "For a salaried individual, the increased duty on fuel was a major negative. Otherwise, it was a neutral budget."