Budget 2007 for the coming financial year 2007-08 is now just a matter of few days. Budget has become an annual ritual; there is whole lot of buzz and excitement and a whole lot of expectations are being built around it.
However, given the fact that a substantial rationalisation in the tax-structure has already happened in the last two-three years, one may not see any path-breaking changes in the forthcoming Budget. But yes, there are still quite a few issues, which could be addressed by the Finance Minister.
Raising the limit of Rs 1 lakh under section 80C
The tax collections have been very buoyant in the current fiscal year and if the economic growth continues, the finance minister can expect a further boost next year too. Therefore, the FM could consider raising the limit under section 80C without seriously affecting the tax collections.
Besides, the Rs 100,000 limit is proving to be too less from the point of view of inducing long-term saving through tax benefits. Rising salaries mean higher provident fund deduction; premium payments on the legacy of insurance policies; clubbing of Rs10,000 under section 80CCC with section 80C; large home loans resulting in large repayment of principal - all this leaves very little room, if any, for further saving.
Therefore, a raise in the limit would be very welcome to make meaningful saving for the long-term.
Clarity on Exempt Exempt Tax on public provident fund
When the FM had introduced section 80C in lieu of erstwhile section 88, he had also indicated moving from the EEE to EET tax-regime. However, since then, two years have passed and there has been no further development in this regard.
While the general expectation is that such a change would be applicable with prospective effect, the element of doubt still remains. If the government were to make EET applicable with retrospective effect, say at least from the time it introduced section 80C, two years ago, it could affect the post-tax returns.
Considering the fact that today one can earn more than 8 per cent per annum tax-free returns from instruments like one-two year fixed maturity plans of mutual funds, why should an investor lock-in his funds at lower rate for 15-years?
Clarity on this issue would help investors to take proper investment decision.
Inflation-indexed bonds
Equity markets may be in the midst of a bull run and giving super-normal returns over the last three years or so. Yet there is a vast majority of investors who would rather play it safe by investing a large portion of their corpus in debt instruments.
However, most of these such as bank deposits, National Savings Certificate, Kisan Vikas Patra, post office and so on are fixed-rate instruments and don't offer any protection against rising inflation.
With the inflation threatening to rise, introduction of inflation-indexed bonds could fill in a very important gap in the long-term financial planning.
Moreover, such bonds could be very useful for the retirees, who depend largely on the interest income.
Anomaly in the taxation of equity-based Fund-of-Fund Schemes
Fund-of-Funds is a very convenient and tax-efficient way of asset allocation. However, presently there is an anomaly with respect to their taxation especially those where the equity component exceeds 65 per cent.
While the open-ended and the close-ended schemes, which have 65 per cent or more equity component, are treated on par with 100 per cent equity schemes, such FoFs are treated as debt funds and as such attract a higher tax rate.
Should the government remove this anomaly, FoFs could become a very important part of one's financial planning.
Some tax-relief on bank interest
Re-introduction of section 80L, even with a lower limit of say Rs 7500-10000 would be very useful.
Everyone must keep aside some emergency funds in the savings account & short-term fixed deposits. These carry a very low rate of interest about 3.5-6 per cent. With section 80L abolished two years back, the post-tax return on these works out to practically nothing. In fact, it doesn't even cover a modest inflation of 5 per cent and hence loses value with time.
Since the amount kept in such short-term instruments is not large, and moreover there would be a limit above which bank interest would be taxable, the loss to the exchequer is going to be very minimal. But the benefit to practically every one of us is going to be huge. One, of course, is a decent return and two is the administrative convenience of not being required to keep track of even a few hundred rupees of interest we earn on the savings account balance.
Let's hope the FM takes care of these issues in the forthcoming budget to give a further impetus to long-term financial planning.
The author, Sanjay Matai, is an investment advisor and can be reached at sanjay.matai@moneycontrol.com
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