How much does the Budget give in your wallet?

LESS TAXING: A panel of experts demystifies what Budget 2008 means to your wallet and your money.

      

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Keywords: Incomes Tax Slabs, Personal Finance

From the policy point of view, it's a good move. As regards the readiness of the industry, we don't have the full range of products today. But I am sure over the next year, we will see companies coming up with some good products.

Health insurance apart, there is a very strong thrust on senior citizens in this Budget. But the premiums for the senior citizens have always been on the higher side for logical reasons. It's a risk issue after all. But now that there will be more demand, can the insurers afford to be a bit softer on the elderly?

Shikha Sharma: The fundamental reason why the policies for senior citizens are more expensive is because of the core issue that there are many more healthcare incidence in case of senior citizens as compared to the younger age group. This is pretty much based on the need to go to the hospital or some disease.

I don't think the tax incentive is going to have an impact on the prices. But as more products come in and there is more data available, the insurers will be able to price these products more efficiently. So, the impact on the prices will be felt only after four-five years.

The Budget has hiked the short-term capital gains tax from 10 to 15 per cent, but 80C remains untouched. Does this mean one should now put more money into equity market through the mutual fund route? The FM said in his Budget speech that the hike in the short-term capital gains tax is aimed at benefiting people who are more keen on investing long term.

Mind you, the capital gains tax is zero after a year whether it's an equity fund or a direct equity transaction. The FM hasn't touched 80C at all even though there was a feeling that there will be a slightly higher limit for long-term savings. Does this mean if one wants the wealth to grow in the long-term, he or she must put some component of it in an equity fund, if one is not familiar with the market, or directly into equities?

Milind Barve: It's not the Budget that's going to change that paradigm. This point was true even before the Budget. To my mind, it makes no difference if we have a short-term capital gains tax of 10% or 15%.

The basic issue is if you want to optimise the return on your portfolio, you have to be a long-term investor. And there is enough time-tested evidence globally to prove that that's the best way for an individual small investor to invest his money well.

And in the short run, when you have a higher tax rate facing you, you tend to react to it and ask if it means I need to act differently.

In that sense, I do believe that if it does make investors remain invested in the market for a longer period, it's a good move. But it will be immature to come to a conclusion that it will significantly change the outlook on the market or the way people look at equity markets.

The mutual fund vehicle is always a better vehicle as it helps one to get the expertise of the fund manager. Also, a mutual fund doesn't pay tax even if it buys or sells in the short term. So the fund manager is at freedom to take a short-term view if he is required to do so in the interest of the investor.

Thus you can let the fund manager take a short-term view on your behalf while you take a longer-term view in order to enjoy zero tax. It gives an added advantage and makes a stronger case for you to want to be invested in equities through a mutual fund.

The other point that the Finance Minister made was that an insurance company now needs to pay a service tax on the fees that it will be giving to the asset management. At present the fee gets deducted from the investor initially. There is a perception that in case of schemes like ULIPs, this fees is already very high. Does this new provision make the fee go up even further? What does this mean for the consumer?

Shikha Sharma: First of all, I must clarify that while there is this perception that the charges are higher, if you sit down and do the math, it's evident that if you are holding the unit-linked policy for a four- or five-year period, you will find it a more cost effective way to access the equity market than any other instrument that you might want to use. So, that perception is not quite the reality.

As regards the impact of the new service tax, it needs to be seen if this service tax can be offset by the tax that insurance companies in turn would have to pay on input services. Because there is an offset between input services and output services, which is available.

If it's not possible to offset it, then the service tax will get passed on to the consumer. In such a case, the total cost of a unit-linked plan could go up by 0.15 to 0.2 per cent per annum, which is not a very significant cost if you are talking about a long-term systematic investment policy.

What will be the impact of the introduction of PAN across all financial instruments? The mutual fund industry was quite upset about the plan that they have to bear that for their investors. But the insurance industry was kept out of it. the Finance Minister has now made it very clear that it will be required for all financial instruments from this year.

Shikha Sharma: The Union Budget actually talks about the introduction of PAN, subject to threshold limits. So, as long as the threshold limits are set reasonably and are set in the context of tax deduction limits, I don't think that will be a deterrent for anybody who wants to invest.

Now that the tax slabs have gone up to about Rs 2 lakh, it would seem logical to ask that an investment of Rs 50,000 to Rs 1 lakh should not be mandated for a PAN number. If that be the case, given that the average premium that most people tend to invest in an insurance policy happens to be between Rs 20,000 to Rs 25,000, we really won't have the inconvenience of seeking PAN numbers for most policies and they will be sought only for the large-value policies.

Chidambaram had some more good news for the senior citizens because he has now clarified that there will be no capital gains when a senior citizen receives money by putting his house on reverse mortgage. Reverse mortgage is a very nascent product, which is just about a year old. But perhaps it has not taken off because of lack of clarification.

Subhash Lakhotia: Reverse mortgage is a completely new product, introduced last year for the benefit of senior citizens. But the government has found that this big advantage is not being availed by most senior citizens primarily because of two reasons.

First, most people thought that if they are going to have the concept of reverse mortgage implemented, they will be liable to capital gains tax as it is a transfer of property. But it has now been clarified in the Budget that this doesn't mean a transfer and hence there is no liability of capital gains tax.

Secondly, it was not clear if the amount received by a senior citizen by way of reverse-mortgage of a property will be counted as an income, thus inviting income tax. Again, this issue has been clarified in the Budget that such earnings will not counted as income.