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The budget is over. Now what?...

Mar 2, 2005

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 every category of citizen/institution 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 you - 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-budgetPost-budgetSavings (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
Note: 2% education cess being common to all is not considered here

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…
Taxable income
InvestmentsTax liabilityInvestmentsNet taxable
income (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
* Pre-budget calculation based on Sec 88 benefits
** 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 an NSC 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 FM 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. However, 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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