If you haven’t discussed the most anticipated budget, even if 20 days later, are you even a Personal Finance blog? Honestly no. So, even though I wasn’t very happy with the budget, I realised it would be silly to not talk about it on this platform. So, keeping it short to the main action points that directly impact salaried individuals like me rather than the broad economy, here are five of the announcements that you should know about:
1. Changes in personal income tax
For me this was one of the most befuddling aspect of the budget. As I watched, I kept waiting as Nirmala Sitharaman kept building layer upon layer of context, much like lasagna although the result in my mind was not even closely appetizing. So apparently in an effort to “simplify” the direct tax code, there were seven new slabs with a vast proportion of the salaried (upto Rs. 15 Lakh of annual salary) given two options to figure which tax bracket they want to pay by. For a population confronting decision paralysis, choice fatigue and declining math smarts, I was zapped. I think most of you would have already figured this piece of the puzzle through the umpteen calculations and the memes floating around. My take? Continue with the old system if only to use it as an excuse to ensure you invest and insure yourself.
2. Dividends to be taxed as per Income tax bracket
Till February 2018, dividend income was tax free and so were the long term gains from equity. The budget that year imposed a tax of 10%+ on Dividends which were to be taxed by companies (in case of direct equity) and Asset Management companies or AMCs (in case of Mutual funds). For investors with dividend income of more than Rs. 10 Lakh from direct equity, the remaining was taxable as per their income tax slab. A lot of industry participants felt that this was creating an issue of double taxation considering the same income was being taxed at source and then at the hands of the investor. Also, a lot of company promoters ended up paying themselves through dividends as a large part of it was taxed lesser irrespective of their income tax bracket. To remedy these concerns, dividends are now to be considered a part of income (much like FD and Savings Account interest) and taxed as per income slab.
In my view, this ruling is great for mutual fund investors. Dividends are not only tax inefficient but also erode wealth creation potential in the long run. So, today Growth options win hands down even for anyone with the temptation of getting regular payouts as Systematic Withdrawal Plan or SWP is a better fit even in that case. As for direct equity, dividends have definitely lost some of their sheen there.
3. 5% TCS on LRS beyond Rs. 7.5 Lakh
Do not get confused by the abbreviations here. LRS or the Liberalised Remittance System is a scheme under which individuals can remit $250000 post-tax income in a single financial year. From this budget onwards, the finance ministry has introduced a TCS or 5% Tax Collected at Source for remittances made beyond Rs. 7.5 Lakh in a year. While it does impact cash flows, like GST this input credit of sorts can be shown and claimed at the end of the year while filing taxes, using Form 26AS whereby all the tax paid under your PAN is conveniently reflected.
4. Tax beyond Rs. 7.5 Lakh employer contribution to EPF, Superannuation and NPS
Rs. 7.5 lakh sure seems to have been the magic number when it comes to this year’s budget. For salaried employees, 12% of the basic salary has been the employer contribution to EPF which has also been tax-free. On top of that, NPS is an added incentive for salaried employees to save tax and save long term for retirement. With this budget, the government now proposes to tax employer contribution amounts beyond Rs. 7.5 lakh in the year. So, for a high salaried individual, if his cumulative employer contribution for EPF, Superannuation and NPS amounts to Rs. 10 Lakh, the excess Rs. 2.5 Lakh is liable to attract taxation as per income slab.
5. Deposit insurance increased from Rs. 1 Lakh to Rs. 5 Lakh
Even though this means higher cost for banks, this change is probably much needed to get back the trust in the banking system, which has seen much erosion in the recent past. So, instead of Rs. 1 Lakh insurance on deposits for every customer in every bank, Rs. 5 Lakh is now the deposit amount insured.
There was of course a lot more announced in the longest budget speech ever by Nirmala Sitharaman. However, Elementum Money is about simplification of Personal Finance. Instead of a knowledge overload from the broader macro economic numbers, most of us can do with gleaning the main changes above, which impact our lives directly.
Have you registered the changes made by Budget 2020? What did you make of these? Let me know in the comments below.