How Budget 2020 can impact your Personal Finance?

1st Feb 2020, was a day of ‘ Budget FY 2020-21’! Our Hon’ble Finance Minister gave us many surprises, made many new and bold proposals. Every year, budget proposes some or the other changes.

Our economy is emerging economy. Mindset of investors and tax payers keep on changing and so the consumption, demand and supply. To keep pace with it, budget proposes many things.But, ” Budget is never a ‘perfect testy receipe” for everyone“. There are some hits and there are some disappointments. Ultimately, the aim is all the proposals should prove good and suitable for our country and economy.

There are lots of discussions and debate going on in the market right now over this. Amidst all these, lets see key proposals of this Budget 2020 and their likely impact on your personal finance.

1.New Tax regime Introduced:

Well, This is a bold move by government which offers flexibility and choice to a taxpayer to select between, old tax treatment and new proposed tax regime. There is no standard rule which says, who should choose which tax regime. Investor must calculate his/her income, investments made ;which can be treated as exemptions under old system and then arrive at a conclusion by comapring possible tax outgo.

Old tax regime talks about your taxable income along with eligible deductions and exemptions available due to investments and insurance taken by the tax payer, HRA deduction etc. Old tax regime makes investors to invest more and that too for a long term. All the deductions introduced and given, like deduction u/s/ 80C, 80CCD,80D, etc are meant for investments and insurance done for a longer term. This way government persuaded ‘Investment culture’ in the country and people made investments at least with the purpose of tax deductions.

However, calculations of income tax considering all exemptions and deductions is complex sometimes under old tax regime.

New tax regime, talks about your taxable income only!! Your total taxable income will be taxed as per the tax slab you fit in! It never tells you to invest in a certain product for your own good which will save taxes too. A salaried tax payer can choose between these two option every AY but a person with business income, can choose this option only once and should continue with it

Opinion:

For next financial year, while filing taxes, please calculate what best suits you and choose the option wisely. If you are a new tax payer, or have a business income, please take services of a ‘chartered accountant’ for selecting the best possible tax regime for you.

I think, government assumes that, by now you know and understand the importance of ‘long term investments’and financial planning. Investing for your short/long term goals as per your risk appetite is crucial too. So, I would say, even if you choose ‘new tax regime’, please continue with your investments on which you used to take ‘deductions and exemptions’. Your goals will be there to fulfill even if ‘tax structure’ may undergo a change during your goal period. Don’t stop or discontinue any investment like PPF or any insurance policy you have taken.

Paying taxes and choosing a tax regime is important but, sticking to your financial plan and your well thought investments is equally required.

So, be an informed tax payer and investor!

For your reference, following is the Old tax regime along with New Tax regime proposed in this budget.

Tax Slabs for FY 2020-21 and Assessment year 2021-22
Old Regime-with deductions and Exemptions
Income SlabIndividuals(below Age 60)Senior citizens (Between age 60 to age 80)Super senior citizens(age 80 &above)
Rs 0 to Rs 2,50,000NilNilNil
Rs.2,50,001 to Rs 3,00,0005%NilNil
Rs.3,00,001 to 5,00,0005%5%Nil
Rs 5,00,001 to Rs 10,00,00020%20%20%
Rs 10,00,001 & above30%30%30%
Tax Slabs for FY 2020-21 and Assessment year 2021-22 
New tax regime- with NO deductions and exemptions 
Income SlabRate of Income tax
Rs, 0 to Rs.2,50,000Nil
Rs. 2,50,001 to Rs 5,00,0005% (with tax rebate u/s 87A)
Rs.5,00,001 to Rs 7,50,00010%
Rs. 7,50,001 to Rs.10,00,00015%
Rs 10,00,001 to Rs.12,50,00020%
Rs 12,50,001 to Rs 15,00,00025%
Rs 15,00,001 & above30%

2. Investment in government Securities through ETF:

To strengthen the debt market in economy, this budget introduced ETF in government securities. a month back, we saw ‘Bharat Bond ETF ‘ getting launched and it got a huge response from investors. Government securities ETF is one such bold and new move.

Government securities come with longer maturity and are sensitive to interest rate changes in the country. Through ETF, government is making them available for investment in more transparent way where, investor can buy/sell the investment during market hours easily.

Opinion:

G-Sec ETF is one of the new ways of investment. Being in G-sec space, it has lower credit risk. Investors, those who have longer investment tenure, who understand interest rate volatility and its impact on G-Sec can consider investments in such product.

3. Bank deposit Insurance raised upto Rs 5 Lakhs:

Bank fixed deposits are everyone’s favorite. In the wake of few bank crisis and seeing the plight of investors , government has tried to engage investors once again with FD.

Raising deposit insurance from earlier Rs 1 lakh to new proposed amount of Rs 5 Lakhs is a good move. Considering the mindset of investors who are biased towards ‘fixed income instruments’, this will prove beneficial.

Opinion:

Through ‘Deposit Insurance and Credit Guarantee Corporation’, you can now get insurance of your bank fixed deposits for Rs 5 lakhs. I always advocate diversification and spreading the risk. Hence, please split your FD investments in 2-3 good, big nationalized banks. This way, your maximum amount will come under the purview of insurance.

4. ‘Dividend Distribution Tax’ proposed to be taxed in the hands of investors:

Dividend distribution tax is paid upon distribution of dividend by companies, equity mutual funds and bond funds. Before this budget, those who were issuing dividends used to pay this DDT which was at 20.56% for equity stocks, equity mutual funds with dividend option used to pay DDT at 11.65% and bond fund dividends were at 29.12% DDT.(the rates include surcharge and cess).

With this new budget, government has abolished this system and has proposed to tax these dividends at the hands of investors as per their tax slab. This is again a bold move.

Opinion:

DDT, if taxed at the hands of investors, then it will benefit those investors of mutual funds, who are in lower tax bracket. Those who fall in higher tax bracket, should opt for ‘growth ‘ option as its assumed that they are not in the need of any income from dividends.

As far as , dividends from companies are concerned, this new tax treatment, will attract more foreign investors, as there will be more money left in the hands of companies which they will pass on in the form of dividends and use for business growth. There is high potential to earn more dividends.

Those, who are in lower tax bracket will benefit here, but those in higher tax bracket will face more tax outgo.

5. Divestment in LIC by government:

Government, in order to raise funds, bring more transparency; has proposed to go for divestment in LIC. LIC is the veteran in the market and has gained lot of faith from its policy holders since years. When such a veteran company stock is available for subscription, it has high potential to raise funds, thereby, company can introduce and upgrade to new systems as per changing environment and technology. This will bring more transparency in operations of LIC and other fellow insurance companies as well.

Opinion:

This move will strengthen the insurance provider thereby benefiting policyholders. With huge asset base and larger no of agents and policy holders, this giant will work in even more efficient manner with raised funds and capital through divestment and pass on the benefits to its policyholders.

6.Affordable Home loans under section 80EEA extended for one more year:

This is a good move by government. Last year budget introduced section 80EEA where, additional deduction of Rs 1.50 lakhs can be made by a tax payer, if he buys affordable home. Sec 24 deduction for home loan interest payment upto 2 lakhs with addition to this, makes deduction for home loan taken under affordable housing scheme, total Rs 3.50 lakhs a year.

This budget continued this additional deduction for financial year 2020-21 too. Affordable home means a home which stamp duty value doesn’t cost more than Rs 45 lakhs. To avail this, a tax payer should not own any other residential property on the date of sanction of home loan.

Opinion:

This decision will boost home buyer’s confidence and affordability to buy a residential property. Consumption in real estate will be boosted. A tax payer, who is choosing old regime, can claim these deduction if he/she buys a home as per affordable home loan category.

There are many other announcements and provisions proposed in the budget. They will directly or indirectly affect investors. But, as Hon’ble finance minister says, “Its a Jan-Jan ka budget; it touches every section”. So, lets hope for better implementation of the proposals which bring in more growth, transparency and a boost to economy.

At the end, I would say, personal finance and investment is a life long journey. Budget , tax implications and its effects are a part of this journey. You must focus on your short/long term goals, understand risk appetite and invest accordingly. Get your basics covered i.e. buy right health insurance and life insurance for you!

Be an informed investor and a sincere tax payer! Get services of expert professional to make this journey of personal finance worth it !

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