How the Budget affects YOU

Tomorrow, the annual Union Budget will be unveiled by the government. In case you are wondering what the fuss is all about, here's how the Budget will affect you and me and what to look out for.

Income tax rates

The most obvious way in which the Budget affects us is by any change in the income tax structure. So, keep your eyes open for any change in the income tax rate or the income slabs.

These are the current tax rates; they were introduced in last year's Budget.

Home loan benefits

Currently, the interest on home loan repayments is deductible upto Rs 1,50,000.

The principal repayment of the borrowed money (loan repayment, and not interest payment), is eligible for a deduction of upto Rs 1,00,000 under Section 80C.

Chances are there will not be any change in this.

Read How to save on tax

Investment benefits

Look out for any change in the way the government taxes dividends. At the moment, dividends from shares and equity mutual funds are exempt from tax.

Also, you pay no capital gain tax on shares if you sell them after a year. If you sell them before a year, you pay a short-term capital gain tax of 10%.

The maximum amount of premium paid on your medical insurance that will be considered for deduction is Rs 10,000. For a senior citizen (above 65 years), it is Rs 15,000.

Watch out for any changes on this front.

Read Where to invest to save tax

Small savings

Look out for any changes in the Public Provident Fund. Will the limit be increased from the present maximum of Rs 70,000 to a maximum limit of Rs 1,00,000 under Section 80C?

There is a very low probability that the interest rates on the small savings schemes like PPF and National Savings Certificate will be touched.

Read How will the Budget affect your PPF?

Section 80C

Will any other investments get included under Section 80C?

Apparently, banks are lobbying to get bank deposits included under Section 80C. Chances are slim that this will take place. Because, if the government does so, it will also have to consider including post office deposits under this section.

Read What falls under Section 80C.

Prices of goods

Manufacturers of goods have to pay some taxes, the most common being excise duties and import duties.

Such taxes are called indirect taxes because, even though the manufacturer pays them, he passes them onto the consumer; that means you and me.

If the taxes decrease, the manufacturer may or may not pass on the benefit to the buyers in the form of a lower price.

If the taxes increase, chances are he will increase the prices of the goods.

Obviously, the consumer benefits if reductions in duties are passed on to him and increases are not. This usually happens in intensely competitive industries like Fast Moving Consumer Goods, or what is referred to as the FMCG industry.

In less competitive industries like cement, companies usually pass on higher indirect taxes to consumers by raising prices.

The need is not with immediate effect

Do note, the changes are not implemented with immediate effect. Here's how it is done.

1. The Finance Minister will introduce the Budget to the Lok Sabha with a small speech and an overall view of the Budget.

2. A general discussion on the Budget takes place and the FM replies to queries.

3. Then comes the Demand for Grants stage. Here, the Lok Sabha discusses each ministry's expenditure proposals and these are voted upon.

4. The bills are then introduced in the Lok Sabha: the Appropriation Bill (final demand for grants to be given to each ministry) and the Finance Bill (all taxation proposals).

At this stage, amendments for tax proposals can be discussed and voted upon.

5. The passing of Appropriation Bill results in the Appropriation Act, and the passing of the Finance Bill enters the statute as the Finance Act. This is when the final Budget gets approved.

This means everything proposed in the Budget tomorrow may not get passed. Remember last year? The FM spoke about a 0.1% tax on withdrawal of cash of Rs 10,000 or more from banks or ATMs on a single day. It was never passed and was not implemented.

To understand the basics of the Budget, read Budget 2006: Here's what you should know

Let's await the Budget

As you can see, the Budget is not just an economic exercise for academicians. It impacts all of us.

The period prior to the Budget always tends to witness a volatile stock market. Whether or not the market rises or falls after the Budget depends on how the Budget is viewed.

Income tax concessions, higher spending on infrastructure and a low fiscal deficit (gap between the money the government has received -- government revenue -- and the amount that it has spent -- government expenditure) are all positive signs.

Let's see what tomorrow brings!