The upcoming Union Budget 2012 is one of the most awaited events of the year. There are several things that are being discussed; fiscal deficit, revenue collections, macroeconomic outlook, but how does it impact common man, his wallet and investments?
Supreme Court advocate and tax expert, HP Ranina, executive vice president at Bajaj Capital, Surjeet Mishra and certified financial planner, Gaurav Mashruwala share their views on what one should expect from the Budget and how should one plan to make the most of it.
Below is the edited transcript of the interview.
Q: This Budget is the last year where the government can mobilize much needed funds because the next year will be the election Budget. Given this, what kind of sessions can you expect for the middle class and for the common man because they have already been impacted severely due to high inflation?
Ranina: I think what the finance minister will do is to give relief to the small taxpayer. To take care of inflation, he will increase initial exemption limit, which currently is Rs 180,000 for men and Rs 190,000 for women. He may increase it to Rs 225,000 or just Rs 200,000. I am not too sure, but he will certainly want to increase that limit at least he will try to show that he is sensitive to the problems which the common man has to face.
I also expect that he will try to increase the savings limit under section 80C, which gives you the benefit of investment in mutual funds or public provident fund or LIC policy premium and life insurance premium. He will try to increase that limit from the current figure of Rs 100,000 to possibly Rs 200,000 because under the Direct Tax Code proposed limit is Rs 300,000.
So, he will try to go midway in this year's Budget and bring it up to Rs 200,000. That will also encourage people to save more and take advantage of the fact that they will be able to lower their tax liabilities, if they make requisite savings. This is the last year when he can raise tax revenues, so I do not expect very substantial concessions, those will be kept for the next Budget which is just before 2014 elections.
Q: What are you major expectations or wish list from this Budget?
Mashruwala: Two things; one is housing exemption; the interest rate exemption that we have is Rs 150,000. The interest housing loan interest is 10-11%, even if you look at simplicity 10%. So, Rs 150,000 will get exhausted even if I am borrowing 15 lakh. If I am borrowing 15 lakh I don't get any house. The government is not able to provide housing and then there is not enough housing exemptions that are available.
Considering higher inflation the rate of interest gone up, the housing cost has gone up. So he should enhance this limit substantially because we are at Rs 150,000 for many-many years now. Similarly, Ranina already said that he will increase 80C or have a separate limit for repayment of principal of housing.
Another one is healthcare, the limit for paying medical premium under section 80D. The cost of medical premiums has gone up, if you have dependents suffering from critical illnesses or disability. In the section 80DD and 80DB, limit is in the range of Rs 40,000-60,000-75,000 depending on the category, but those aren't sufficient.
This is because when you have a critical illness or disability the amount of money that we spend is to much. So, apart from what Ranina said, section 241 where we have housing loan interest repayment and expenses incurred for critical illness and disability, I wish something is done there.
Q: What are you expecting to hear from the FM this time around because the insurance and mutual fund industries also have some specific concerns that they are hoping to be addressed?
Mishra: There are two basic points that one would be expecting. One is that we are seeing a greater inflationary condition where the savings have gone down in the common man's space. So, there should be some initiative from government's side to increase savings rate and release some funds in the hands of the middle class who pay tax. There can be enhancement on the tax limit, so there will be some amount released and that can be utilized for savings.
The second is this EEE threat which is still coming. Against EEE you will be having the EET. So, government should clarify that doubt which is hampering investments in insurance and mutual funds, particularly in the ELSS category. Some clarification should come will make sure that investors continue to invest in long term in the ELSS schemes of mutual fund and in the long term savings products on the insurance side.
Thirdly, there has been a great way of funding infrastructure through infrastructure bonds because the cost of borrowing is pegged at the ten year G-sec level. The infrastructure finance companies are finding it very apt to get that money at 8-8.5% or 9% and they can lend it at a relatively higher rate. So, this is just a good way of funding infrastructure. Enhancement of limit in 80CCF from Rs 20,000 to maybe Rs 40,000-50,000 will increase the collection for infrastructure funding, which will help the government in turn.
Q: Just taking forward that ELSS point, now ELSS is one segment that gives you equity exposure with a tax saving benefit and now that is likely to go away when the DTC comes into force. So the common question that usually arises for me as an investor, should I be investing in ELSS today? What would be my tax exemption or would there be any after three years after the lock in has completed?
Mishra: My sense is if there is EET which is coming in, it will not be effective retrospective. The current year investors would be getting the EEE benefit. But in future from 2012-2013 financial year onwards, if EET concept gets introduced then ELSS becomes a threatened category and may or may not exist then after.
This is because people will definitely go for equities and take that risk because the net take home at the end of the year is tax free because it completes three years, capital gain and dividend is tax free. So, with that dual benefit going away this product will lose its charm. This is one of the best ways of long term wealth creation. So, I feel this will be not in good interest of general investor if they take away that benefit.
Q: What would your advice to investors be? Should I as an investor put in my money in ELSS scheme today?
Mishra: I feel the investors who are putting in money currently should continue because the retrospective effect is not likely, it hasn't happened in the past.
Q: If the expectation on exemption limits comes through how much of a impact would it come on the middle class salaried individuals roughly because majority of the benefit would come of those earning between Rs 8-10 lakh who would have to pay 20% instead of the current 30% as tax?
Ranina: That depends on whether they extend the slabs or they widen the slabs in this years Budget or whether he will wait for the direct taxes code itself. But, if he simply increases the initial exemption limit it's a very poultry amount of benefit, which a common man will get.
Suppose he increases it from Rs 180,000 to Rs 225,000 that is on Rs 45,000 and 10% rate means he will get a relief of Rs 4,500. That's all that he will get. It is only of he widens the tax slabs at say from Rs 3 lakh he makes it Rs 4 lakh or from Rs 5 lakh he makes it Rs 8 lakh, then there would be a substantial benefit to the middle class tax payer. Otherwise, this is only going to be very cosmetic in its impact.
Q: Coming to the ATC part of it now given that those benefits go up to Rs 1.5 lakh from Rs 1 lakh currently and under 80 CCF goes up to Rs 50,000 from Rs 20,000 currently, how should an individual pace out his investments? What are the key things to keep in mind given that this entire thing, assuming this comes through that this thing is gone up significantly?
Mashruwala: Again I would go back to look at your financial goals because the moment this limit widens you would have all the possible options. You would be paying your children's school fee which is benefiting you, when it comes to investment you would have retirement products, so depending on what age bracket you are in and are you saving for retirement then go all out on retirement.
If you are looking for some long term goals, ELSS is still an option this year. There will be several permutation-combinations available, if you are looking at a near term goal. Depending on your goals, you would have much more amount, which you can invest and still get tax exemption, tax benefit that will come in. Choose and pick what you needed but we will have equity, debt, retirement and pension products, children's tuition fees, housing loan repayments, so couple of options will be there.
Q: The Rangarajan committee has recommended that there should be some incentive for investments in the financial assets to discourage investors from investing into physical gold. Heavy gold imports have contributed to the spike in the current account deficit and in fact gold has already become more expensive because of a hike in customs duty. What is your advice to investors and what do you feel in this regard?
Mishra: Being a student of finance, I understand that gold is not an investment; gold is just a hedge against inflation. By nature of the upbringing, we have got a habit of buying gold and creating a reserve. From the economic point of view, gold is a capital asset created which is not reproductive in nature and it doesn't help the economy.
If you look at last year's fiscal deficit and gold import, which is close to 70% of total current account deficit, is a worry for the government and the local market. This is because most of our foreign currency reserve will be utilized in buying gold; it will not be utilized for productive usage of economy.
I would suggest all investors to refrain from exposing themselves higher into gold. In case the Rangarajan committee recommendations are taken into and the fiscal incentive or some support is given to investment in mutual fund and insurance, it will be a significant boost.
This is because money that comes into mutual funds and insurance in turn gets into productive assets in the economy, which creates job opportunities and capital formation. It will be in best interest of the economy to incentivize both mutual fund and insurance instead of supporting gold buying.
Q: Currently there is a differentiation between deduction for interest on housing loans in case of a self occupied property that is capped at Rs 1.5 lakh and rented property which doesn't have a limit as of now. Do you think this difference will be bridged and if so how?
Ranina: In fact this difference should be removed. There is no reason to limit it to Rs 1.5 lakh. The government may increase it slightly to Rs 175,000 or Rs 200,000 but I don't see any reason for this type of differentiation. The reason is that you want to encourage people to buy their own houses, price of properties are going up and interest rates are going up. This cap of Rs 1.5 lakh is a totally artificial cap. It has no relevance to any type of parameter, whether it is value of the asset or loan or interest.
This arbitrary figure and as no bearing at all, is not relevant at all, I think it should be completely removed. Whatever interest you pay should be allowed as a deduction because that's the only way by which indirectly the government will be subsidizing or helping the common man to acquire his own property. Housing apart from giving a benefit to the person concerned himself; it is a great economic activity. The more housing there is there will be more demand for cement, steel, bricks. It is a labor intensive industry. So, you are giving a boost to the whole industry and that will accelerate industrial and economic growth in our country.
Q: The expectation is also that income tax exemption for interest on housing loans is expected to increase to Rs 3 lakh from the current Rs 1.5 lakh. We hope that this entire gap is bridged, but however right now expectation is that it will go up to Rs 3 lakh. Given this what kind of a saving can one expect from this increase?
Mashruwala: If it goes to Rs 3 lakh and then depending on what tax slab you are in, if you are 10% bracket and if you are paying Rs 3 lakh then additional Rs 1.5 lakh will save some Rs 15,000. If you in 20% bracket Rs 30,000, if you are in 30% bracket Rs 45,000. That's not a major saving because the cost of housing has gone up so much, plus the interest rates are high.
That is not a substantial saving for somebody who is specifically purchasing first house or even if it's like I am doing another investment, I am buying another property, which I will rent out, so I am creating housing opportunity. There is some incentive. It is better than the present situation. But it is still not sufficient. The cost is really, really high.
Q: What is your expectation with respect to a possible hike in excise duty and also service tax of course GST won't come in this time but negative list is expected to come in?
Ranina: I expect him to rollback the incentives which he gave in 2008. Therefore, I do expect that he will increase the excise duties and the service tax and bring it up to the same level of 2008. This is the only year when he can do this because thereafter its the pre-election Budget, so this is the only year when he can bring about fiscal consolidation.
Fiscal consolidation is very important and in my view many FIIs and many foreign investors will also be quite enthused if the government is able to limit its fiscal deficit as a percentage of GDP. So excise duty increase is on the cards, service tax increase is on the cards, there will be a complete rollback of the position as it was in 2008.
Q: Do you also expect that luxury goods and services are susceptible to higher taxes vis-à-vis the others?
Ranina: Possibly yes, possibly there maybe further increase in excise on diesel cars. There can be some further increase on certain luxury items. Yes, I think he will do that and he will justify on the ground that the situation demands it.
Q: Given this we have some expectations which will give relief to investors' wallet and on the other hand we have these indirect taxes which could increase cost. Given both these things for a middleclass salaried person how do you compare what one could gain by way of an increase in the exemption limits versus possible increase in cost for a person. In simple words how much cash would be left in hand?
Mashruwala: I don't know what will eventually come out, but net-net in all probability he will end up spending more. Very rarely we have a situation where Budget after Budget he is going to save more amount of money because whether it is direct tax or indirect tax it keeps going up.
Nani Palkhivala used to say that why don't you link all these exemptions to index number because we anyway have indexation and just put it on autopilot, but no finance minister have been doing it. We have inflation rate which is galloping it much faster rate than the kind of savings that comes in. Net-net the investor will end up spending more than saving.
Q: Do you agree with that?
Ranina: Yes, in a sense I do, but there is a practical difficulty in indexing it to the inflation because that is an odd figure, to simply index it to the inflation that has taken place may create problem from a practical point of view. As long as the government revises the limits maybe once in three years, it will meet the same objective.
Q: What according to you is the most important thing that you would like to hear from the FM which will help the common man given the current economic environment, the inflation and the suffering that the common man has seen?
Mishra: I think two things; I cannot limit to one. One is the increase in tax slabs and more in the lines Ranina has suggested broadening the tax gaps. Second is where they can get some money in the hands of the investor. Some stimulus for the investments in the productive investment options like mutual fund and insurance.
Mashruwala: Over above what he stated two things; housing and healthcare because in both the cases costs have gone up.
Ranina: I would certainly say bring down the increased initial exemption limit, bring down the tax liability on the taxpayer. Give them some relief at least at the lower levels and I am sure that lot of people will be very happy with that.
Give more opportunity for savings in financial instruments, so that they can invest in them instead of gold. This would be a step in the right direction because even though government may lose a little revenue today, ultimately the economy will stand to gain.
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