The Budget is not just an annual ritual on taxation and reforms. Instead, it profoundly impacts the way one invests and the criteria one should use to choose investment avenues.
Smart investors fine tune their investments as per the Budget announcements to make the best possible use of tax deductions and other sops.
Here is a look at some investment decisions you can adopt taking a cue from the Budget 16-17.
Is EPF a good investment instrument post budget?
Employee Provident Fund, a Small saving scheme, is one of the most popular social security schemes in the country. Under EPF, twelve per cent of one’s salary, including basic and DA, is invested voluntarily. One can also avail a tax deduction for this contribution under Section 80C.
The interest earned on this investment till now was tax-free. But, from 1st April 2016, only withdrawals up to 40 per cent of the corpus available at retirement will be tax-free and one will have to pay tax on the interest in the remaining 60 per cent.
Now, EPF being at par with NPS as a partially taxable financial instrument, one can wisely plan distribution of investments in both, and at the same time opting for avenues like PPF to earn tax free interest on the corpus. The contribution to PPF is also eligible for income tax deductions.
Do partial tax-free returns make a case for NPS investment?
In the budget 2016-17, NPS has been made partially tax-free, brining it on par with EPF as a senior-friendly pensioned plan. Earlier, you could withdraw only 60 per cent of the total corpus in NPS and you had to purchase an annuity plan with the remaining 40 per cent. Both the returns from annuity and the withdrawals were taxable.
Now, as per the new budget announcement, the corpus available for withdrawal on maturity will be tax-free up to 40 per cent of the total corpus. So in case of an NPS corpus of Rs10 lakh, you can buy an annuity of Rs 4 lakh, and need to pay a tax on only Rs 2 lakh of the remaining Rs 6 lakh corpus, instead of the earlier tax system applicable on entire Rs 6 lakh.
One can now consider NPS as a safe retirement investment option in the coming days.
Are deductions on home loan really useful?
First time home buyers have been offered an additional tax deduction of Rs 50,000 on interest repayment if the home loan is not more than 35 lakh and the property price is within 50 lakh. This means people living on rent, or any first time budget home buyers can now make use of the tax incentives and live up their dream of owning a home.
Earlier, home loan borrowers who had taken up a loan for self-use property had two tax deductions on offer. They were allowed a Rs 2 lakh benefit for interest repayment under Section 24B and Rs 1.5 lakh for repayment of principle amount under Section 80C. Now you can additionally save anywhere between Rs 5150 to Rs 15450, depending on your tax bracket, if you make full use of the deduction on offer.
With interest rates on the lower side, additional tax sops and encouragement for affordable housing projects from the government, this is a good time for investing in real estate for the realizing the dream of owning a house.
How beneficial is the relaxation of long term capital gains tax?
One of the major financial decisions the finance minister made is the reduction of long term capital gains from three to two years for investments in unlisted firms. If you have investments in the equity market through shares of unlisted companies, you could claim exemption on LTCG tax (which is at 20 per cent) only if you stayed invested for more than 3 yeaRs
Now, as the timeline for staying invested in unlisted companies has been brought down, if you invest in an unlisted company, you can exit after 2 years without paying capital gains tax. Ths reduction in period of holding will make it easy for and shareholders to exit and try out new investment opportunities or companies.
With additional 1 per cent excise duty, should you still invest in gold?
The finance minister has announced a 1 per cent excise duty on gold and diamond jewelry. So if you were planning to invest in gold, you will have to shell out more money than before. With the excise duty in place, the cost of jewelry will go up. The import duty of 10 per cent on gold has already there has made gold an expensive investment option.Now with the fluctuating gold price in the recent years along with the additional excise duty, it’s time for rethinking on gold investments.
Investors are likely to look at other options like silver as it has been exempted from the excise duty hike. If you have already invested in gold, or have gold jewellery as an asset, alternatively, consider utilizing the government’s gold monetization scheme, which could generate tax-free interest on your gold in hand when deposited at a bank.
Dividend tax – how it may impact your investments
If you have an annual dividend income more than Rs 10 lakh, you will now have to pay an additional 10 per cent dividend distribution tax. Earlier, there was no DDT on the dividend income.
As a small time investor, this change may not impact you today, but if you are planning to invest in equity for the long term, then it is a call to prune your equity investment portfolio.
If your portfolio consists of equity investments, bagging you dividends close to 10 lakh a year, then you may need to take a call on investing in growth funds and options instead of dividend equity. With markets entering a bear phase and with the onset of DDT, investing in growth funds and options instead of direct equity may just be the direction your investment portfolio may need.
So, is it the time to change your investment strategies now? Analyse your options and the related Budget announcements to take a smart call.
Illustration: Uttam Ghosh/Rediff.com
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