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You'll have higher disposable income: Budget 2012 - Outside View by PersonalFN
You'll have higher disposable income: Budget 2012

The Budget 2012 received varied response from various pockets of the society. Some say it's a non-event and others believe it to be a good attempt in a situation of political pressures and rising fiscal deficit. On direct taxes front, more importantly, the Finance Minister this time removed the distinction between 'men' and 'women' as regards tax exemption limit is concerned. However, the exemption limit for the Senior citizens stands unchanged at Rs 250,000.

Although there were no clear signs about the implementation of the much awaited Direct Tax Code (DTC), the Budget 2012 laid down some tax sops for the common man and moved a step closer to DTC, by increasing the base exemption limit, and changing the tax slabs as under:

Income-tax rates in Budget 2012
Taxable Income Tax Rate
Upto Rs 200,000 Nil
Rs 200,001 to Rs 500,000 10%
Rs 500,001 to Rs 10,00,000 20%
Rs 10,00,001 & above 30%

This thus has put in more disposable income in the hands of the individuals, as the base exemption limit has been increased from Rs 180,000 at present,to Rs 200,000. Moreover, the tax slabs too have been changed in order to further boost the disposable income. The higher tax bracket would now be applicable to individuals earning more than Rs 10,00,000 instead of earlier limit of Rs 800,000.

Impact on the individual tax payers...

To better understand the above changes on your taxable let's have a look at the example below.

Taxable Income in Rs   10,00,000
Upto Rs 180,000 Nil -
Rs 180,001 to Rs 500,000 10% 32,000
Rs 500,001 to Rs 800,000 20% 60,000
Rs 800,001 & above 30% 60,000
Tax payable   152,000
Education Cess 3% 4,560
Total Tax (Rs)   156,560
Taxable Income in Rs   10,00,000
Upto Rs 200,000 Nil -
Rs 200,001 to Rs 500,000 10% 30,000
Rs 500,001 to Rs 10,00,000 20% 100,000
Rs 10,00,001 & above 30% -
Tax payable   130,000
Education Cess 3% 3,900
Total Tax (Rs)   133,900

An individual earning Rs 10,00,000 would now stand to benefit from the changes in the tax slabs and the exemption limit. In the table above the individual's total tax payable reduces by Rs 22,660 (Rs 156,560 - Rs 133,900).

In addition to this, the Budget 2012 has also laid down a few sweeteners:
  • Exemption of upto Rs 10,000 for interest from savings bank accounts for individual tax payers

  • Deduction of upto Rs 5,000 for preventive health check up

  • Senior citizens not having income from business proposed to be exempted from payment of advance tax

  • Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant andmachinery.
However, the Budget 2012 was silent on the extension to the section 80CCF created for long-term infrastructure bonds, which allowed an individual to claim deduction of an amount upto Rs 20,000. Thus, we assume that the said section may not be extended in the financial year 2012-13.

Our view:

The changes made to the direct taxes will have a positive impact for individual tax payers. However, if section 80CCF is not retained, individual tax payers will stand to lose additional tax benefit by investing in long-term infrastructure bonds a sum of upto Rs 20,000, (which is over and above the limit available under section 80C).

However having said that, in our view Budget 2012, (in the midst of fiscal problems) has given due attention to the individual tax payers by giving them some respite amongst soaring price rise (inflation).Also the proposal on direct taxes can also be put forth as a step closer in migrating to the Direct Tax Code (DTC) regime. But a timeline on the implementation of the much awaited DTC, if it had been announced by the Finance Minister (in Budget 2012), would have given a direction to the "aamaadmi".

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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