The much 'awaited' event of any and every year, irrespective of the time and season, the Union Budget, passed through comfortably on Monday.
And at the end of the Budget speech, it was all cheers on the bourses. The budget seemingly went down well with most people in the country -- individuals, corporates, stock markets, etc. The next few days in the media would continue to be dominated by budget analysis on various sectors - print, fine print and implied print, including clarifications, rollbacks, et all.
We focus here in brief on how the common man and (possibly) a retail investor in equities, stands to benefit from the Budget announcements pertaining to personal income tax.
To begin with, the table below shows the tax liability of a common man at various income levels considering that he opts NOT to invest in any tax savings instruments:
Tax liability: Assuming NIL investments
| Taxable income (Rs) | Pre-budget | Post-budget | Savings (Rs) |
| 50,000 | - | - | - |
| 75,000 | 4,000 | - | 4,000 |
| 100,000 | 9,000 | - | 9,000 |
| 125,000 | 14,000 | 2,500 | 11,500 |
| 150,000 | 19,000 | 5,000 | 14,000 |
| 175,000 | 26,500 | 10,000 | 16,500 |
| 200,000 | 34,000 | 15,000 | 19,000 |
| 225,000 | 41,500 | 20,000 | 21,500 |
| 250,000 | 49,000 | 25,000 | 24,000 |
| 275,000 | 56,500 | 32,500 | 24,000 |
| 300,000 | 64,000 | 40,000 | 24,000 |
| 500,000 | 124,000 | 100,000 | 24,000 |
| 750,000 | 199,000 | 175,000 | 24,000 |
| 900,000 | 268,400 | 220,000 | 48,400 |
| 1,000,000 | 301,400 | 275,000 | 26,400 |
A back of the envelope calculation reveals (see table above), thanks to the hugely favourable announcements made by the Finance Minister (FM) in the budget, the 'aam aadmi' has benefited immensely on the income tax front. Considering the two scenarios - pre & post budget, the taxpayer will make a substantial saving on his income tax outgo.
Tax liability: Assuming upto Rs 100,000 invested in permitted instruments
| Pre-budget* | Post-budget** | |||||
| Taxable income (Rs) |
Investments | Tax liability | Investments | Net taxable income (Rs) |
Tax liability |
Savings (Rs) |
| 50,000 | - | - | - | 50,000 | - | - |
| 75,000 | 20,000 | - | - | 75,000 | - | - |
| 100,000 | 45,000 | - | - | 100,000 | - | - |
| 125,000 | 70,000 | - | 100,000 | 25,000 | - | - |
| 150,000 | 95,000 | - | 100,000 | 50,000 | - | - |
| 175,000 | 100,000 | 11,500 | 100,000 | 75,000 | - | 11,500 |
| 200,000 | 100,000 | 19,000 | 100,000 | 100,000 | - | 19,000 |
| 225,000 | 100,000 | 26,500 | 100,000 | 125,000 | 2,500 | 24,000 |
| 250,000 | 100,000 | 34,000 | 100,000 | 150,000 | 5,000 | 29,000 |
| 275,000 | 100,000 | 41,500 | 100,000 | 175,000 | 10,000 | 31,500 |
| 300,000 | 100,000 | 49,000 | 100,000 | 200,000 | 15,000 | 34,000 |
| 350,000 | 100,000 | 64,000 | 100,000 | 250,000 | 25,000 | 39,000 |
| 500,000 | 100,000 | 109,000 | 100,000 | 400,000 | 70,000 | 39,000 |
| 750,000 | 100,000 | 184,000 | 100,000 | 650,000 | 145,000 | 39,000 |
| 900,000 | 100,000 | 253,400 | 100,000 | 800,000 | 190,000 | 63,400 |
| 1,000,000 | 100,000 | 286,400 | 100,000 | 900,000 | 242,000 | 44,400 |
** Post-budget calculation based on investments deductible from taxable income without Sec 88 benefits
The table above shows the tax liability of an individual assessee who opts to make the requisite/maximum permissible investment in order to reduce his tax outgo. Even in this case, the savings are significant.
However, it must be noted that in all of the cases above, the impact of other clauses like that of standard deduction (now done away with), interest on housing loan, mediclaim premium, etc. have not been considered here, all of which would further aid in the reduction of net taxable income in both the scenarios.
Further, in case of women and senior citizens, the tax benefits would be higher.
So, now that the budget is over and the common man/investor is left with higher disposable income, what can possibly be done with the savings?
We reckon, it really wouldn't appeal to park your savings in bank fixed deposits, which have paltry returns of 5%-6% or a National Saving Certificate where interest rates are about 8% (until and unless you are an absolutely risk averse investor), considering that inflation would not only negate most of these returns but these would now be taxable.
But, if you have some risk bearing appetite, other investment options like equity linked savings schemes, which have the potential to deliver relatively higher returns, could be considered.
However, another good option, if not considered yet, would be to get yourself and your family an insurance and pension cover.
Last but not the least, from an optimistic point of view, even if this money is not parked as an investment, the higher disposable income would work in favour of our economic growth, as people may increase their spending on food, clothing, automobiles, mobile phones, computers, consumer durables, etc. all of which will lead to fatter bottomlines for India Inc. (not to forget reduced corporate tax).
And this increased domestic consumption in turn will aid a faster economic growth. Of course, some of this additional savings could also find their way into fixed deposits.
So, while the finance minister has tried his best to play a balancing act considering his political compulsions and market expectations, only time will tell whether his revenue collection targets will be achieved and the country's fiscal position will be maintained considering the various allocations announced by him in the budget.
But from the stock market point of view, while most of the budget seems a positive and the reform intent of the government also clear, it would only be wise to continue to stay invested into equities, keeping your risk bearing capacity firmly in mind. And, don't forget the valuations!
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