Union Budget - A ready reckoner
On February 29, 2016, Finance Minister Arun Jaitley would announce the Union Budget for fiscal 2017. With the global economy beset with uncertainty, intensified by the slowdown in China and falling crude oil prices, every Indian eagerly awaits the Budget, one to assess the growth path for the economy and two, to fathom how it would impact his / her personal savings and taxation. This article is an attempt to decode the key parameters that an investor should watch for, in the upcoming Union Budget.
The Budget Lexicon
The ‘Annual Financial Statement’ or Budget is presented in the Lok Sabha in two parts viz. the Railway Budget and General Budget. The former relates to railway finance and the latter highlights the government’s accounts - including revenues and expenditure - for the fiscal year from April 1 to March 31, and provides estimates for the next fiscal. After the Budget speech, it is laid down in the Rajya Sabha. The budget primarily aims at optimal allocation of scare resources for several government activities and ensures prudent spending. It is prepared by the Finance Minister in consultation with several ministries.
The Economic Survey, released prior to the budget, highlights key developments over the preceding 12 months. It provides a brief on major development programmes and highlights the government’s policy initiatives and economic prospects over the short to medium term.
Chart 1: Core elements of government finance
Revenue and capital budget
The revenue budget comprises revenue receipts and expenditure of the government. Revenue receipts are divided into tax and non-tax revenue (interest and dividend on investments made by Government, fees and other receipts for services). The revenue expenditure contains the government expenses, including subsidies (on food, fertiliser and fuel and the minimum support price) and interest payments. The capital budget covers capital receipts and payments, whose components are long-term in nature. Capital receipts includes loans raised by the government from the public (also known as market loans), borrowings from the Reserve Bank of India (RBI) and other parties through sale of treasury bills, loans from foreign governments and bodies, and recoveries of loans granted by the Central government to state and union territory governments and other parties. It also includes proceeds from the disinvestment of government stake in public sector units (PSUs).
Capital payment i.e. capital expenditure is the money spent on creation of an asset. It refers to spends on land, building, machinery or equipment, or construction of assets such as a highway or dam. It could also include investments like shares. Loans and advancements approved or sanctioned by the Central government to state and union territories and PSUs are included. Plan and non-plan expenditure - Government expenditure could be plan or non-plan. Plan expenditure is incurred post consultation the concerned ministry and Planning Commission. It includes funds spent on several development schemes catering to different sectors. Non-plan expenditure is interest payment on government debt, subsidies, defence, pensions and other administrative costs of the government. Fiscal and revenue deficit - When the government’s expenditure exceeds its income, it leads to a fiscal deficit. To meet the deficit, the government has to borrow funds and bridge the gap between income and expenditure. Primary deficit is a sub-set of fiscal deficit – it refers to fiscal deficit minus interest payments for the year. Revenue deficit is the difference between revenue expenditure and revenue receipts of the government during the financial year.
Plan and non-plan expenditure
Government expenditure could be plan or non-plan. Plan expenditure is incurred post consultation the concerned ministry and Planning Commission. It includes funds spent on several development schemes catering to different sectors. Non-plan expenditure is interest payment on government debt, subsidies, defence, pensions and other administrative costs of the government.
Fiscal and revenue deficit
When the government’s expenditure exceeds its income, it leads to a fiscal deficit. To meet the deficit, the government has to borrow funds and bridge the gap between income and expenditure. Primary deficit is a sub-set of fiscal deficit – it refers to fiscal deficit minus interest payments for the year. Revenue deficit is the difference between revenue expenditure and revenue receipts of the government during the financial year.
Public debt is what the government borrows. It is sub-divided into internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources)
Direct and indirect taxes
Taxes are a major component of public revenue. They are of two types - direct and indirect. Direct taxes comprise corporate, personal income, capital gains and wealth tax. Indirect taxes include customs duty, central excise duty, value-added tax (VAT) and service tax.
What individuals need to look at?
The budget will have far-reaching consequences on every segment of the economy and could change the course of financial markets (equity and debt). Individuals can feel the impact on their income and investment decisions. Hence, they need to watch out for certain measures.
Income tax slabs
While taxes form the primary source of income for the government, they are most feared by individual tax payers as they can reduce income levels and discourage savings and investments. The total income for men and women below 60 years is taxed as per income tax slabs mentioned in Table 1. Thus, individual tax payers must look for any revisions in tax slabs and take financial decisions accordingly. Senior citizens, aged above 60, enjoy a tax exemption limit of Rs 3 lakh.
Changes in tax exemption limits under Section 80C
Section 80C Act provides a wide range of investment avenues such as equity linked saving schemes (ELSS
) offered by mutual funds, the Public Provident Fund (PPF), the National Savings Certificate (NSC), unit-linked insurance plans (ULIPs) offered by insurance companies, among others. Currently, investments up to Rs 1.5 lakh under this section can save taxes for investors. While further hike in this limit can help investors save on their tax outgo, it is advisable that investors consider their risk return profile to derive maximum benefit. For instance, young investors with a wider horizon would find ELSS schemes more lucrative as it helps them draw higher returns from equity as an asset class, spread over a longer timeframe.
Measures announced to boost retirement savings
A nuclear family set-up, spiraling cost of living and dearth of social security measures compels investors to start building a retirement nest from an early age. Option are aplenty, ranging from traditional options [bank fixed deposits (FDs), NSC and provident fund (PF) or the PPF and new [National Pension System (NPS), mutual fund linked retirement plans (currently three schemes which are mix of equity and debt), pension plans from insurance companies] Investors must assess any changes in tax rules for aforementioned products or other measures that could boost their retirement savings. For instance, in the previous budget, the government laid down measures to channelize retirement savings towards pension schemes. To make the NPS more attractive, investors were given an additional tax benefit of Rs 50,000 under Section 80CCD (1B) of the Income Tax Act. This is in excess of the Rs 1.5 lakh benefit available under Section 80 C which also caters to other tax saving instruments such as provident funds, tax saving mutual funds, etc. and even NPS.
Announcements pertaining to capital gains and dividend income tax
Returns from several asset classes are taxed differently. For instance, bank FDs are taxed as per the tax bracket, with 10% TDS if the interest crosses Rs 10,000 in any financial year. Investment in equities is taxed as per the holding period. The short-term capital gains (STCG) tax is applicable if stocks are held for less than one year; conversely, the long-term capital gains (LTCG) tax becomes effective if stocks are held for more than one year. STCG is taxed at 15% and LTCG is nil. Dividends are tax-free for investors. Equity oriented funds follow a similar tax structure, with regard to the tax on capital gains and dividends.
The tax treatment of debt funds was changed in Budget 2014-15. The LTCG tax on debt-oriented mutual funds was hiked from 10% to 20% with indexation and the definition of 'long term' was modified to 36 months from 12 months, effective from July 10, 2014). This measure had reduced attractiveness of debt funds. Investors should keep note of any such developments.
So, with barely a month left, the countdown to the Budget has begun. Brush up your key budget concepts to crack the upcoming budget and comprehend its implications on your income and investment activities.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
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