Decoding the Union Budget 2018 and Key Stocks in Action Today

Fri, 2 Feb Pre-Open | Parth Parekh, TM Team

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Standard Deduction of Rs 40,000 to Marginally Benefit the Salaried Individual

The tax slab remains unchanged. However, Mr Jaitley provided certain deductions which could marginally benefit the salaried individual.

The budget provided a standard deduction of Rs 40,000 for salaried individuals. Standard deduction essentially means that the employee does not require to furnish any investment proofs or bills to claim this deduction of Rs 40,000. However, there is a catch.

If you claim the standard deduction of Rs 40,000, you would be unable to claim any medical reimbursement and transport allowance. Medical reimbursement could be claimed upto a maximum of Rs 15,000 and transport allowance could be claimed upto Rs 19,200.

Hence, if you claim a deduction of Rs 40,000 as a standard deduction, you would have to forgo the medical and transport allowance which amounted to Rs 34,200 (15,000+19,200). So, there is a net benefit of Rs 5,800 (40,000-34,200) on account of this proposal. Additionally, the benefit is that you do not have to furnish any documents to claim the standard deduction.

This benefit is further diluted by increasing the cess payable from the current 3% to 4%. Considering the overall scheme of things, it is likely that the salaried taxpayer would have to shed out more in taxes.

Budget Imposes Long Term Capital Gains of 10% on Sale of Equity Instruments

Mr Jaitley announced a long-term capital gains tax of 10% on sales of listed securities on gains over Rs 1 lakh. This came in as a surprise for the market. The market at the worse was expecting a change in the definition of long term capital gains.

Currently, sale of listed securities beyond a period of one year are exempt from taxation. The market was expecting this period of one year to be extended to two or three years.

However, as per the current proposal if you sell your equity within the period of one year, you would have to pay the usual 15% short term capital gain on your gains. For period beyond one year, you will have to pay a long-term capital gain of 10% without the benefit of indexation.

Nevertheless, the tax imposed is still lower than the short-term capital gains tax and a third of what you would pay if your earnings are in the highest tax bracket from any or all other sources.

Also, with the "grandfathering" that the government has allowed, the new levy should hurt less than previously thought. Put simply, this means there is no retrospective taxation.

For example, if an equity share is purchased six months before January 31, 2018 at Rs 100 and the highest price quoted on January 31, 2018 for this share is Rs 120, there will be no tax on the gain of Rs 20 if this share is sold after one year from the date of purchase.

However, any gain in excess of Rs 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, 2018.

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Reduction in Corporate Tax Rate to 25%

In a major boost to corporates, Mr Jaitley reduced the corporate tax rate to 25% for companies having a turnover upto Rs 250 crore. This would benefit the companies in the and Micro, Small and medium enterprise (MSME) segment. Earlier the benefit of lower taxation was available only to companies having a turnover of upto Rs 50 crore.

This would leave corporates with surplus cash which could be retained for growth purpose or paid out as dividend.

Government Misses Fiscal Deficit Target

Government misses the fiscal deficit target of 3.2% to be maintained in the current fiscal. The government has revised the target in the budget to 3.5%.

Further, the target for FY19 has been fixed at 3.3% as against the Fiscal Responsibility and Budget Management Act target of 3%.

A slippage in achieving the budgeted fiscal deficit numbers, can drive the bond yields upwards. This could be a negative for Indian equity markets. Rising interest rate scenario is a negative for equity markets, as investors shift to safe heaven assets such as government bonds.

Further, a deterioration in fiscal deficit numbers may also lead to a sovereign downgrade by ratings agency which could lead to a correction in the benchmark indices.

Companies to Declare Quarterly Results Today

The stocks of Bajaj Auto, Godrej Property, Hindalco, Indian Energy Exchange, are expected to be in the news as they declare their results for the quarter ended December 2017.

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