The government under the leadership of Prime Minister Narendra Modi took office on 26 May 2014 amid great expectations that things will change for the better. One year hence, although the optimism has faded a bit, the overall mood remains upbeat.
One of the promises that Modi made during the election campaign was to contain inflation. Consumer price inflation has indeed come down over the past one year, helped by a fall in global crude and commodity prices.
Inflation might be finally under control, but those in the job market are still waiting for the good days. Tarun Anand, 41, co-founder of Universal Business School in Karjat, Maharashtra, says there has been a pick-up in the job market but not as much as desired. “Sectors such as banking and financial services haven’t changed at all. The only sectors that have seen green shoots are marketing, digital marketing, e-commerce and capital KPOs (knowledge process outsourcing),” said Anand.
However, at the aggregate level, the government has taken steps to help households across income categories. Schemes such as Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana and Sukanya Samriddhi account are all in this direction. Here’s a look at some of the other steps that have an effect on your money.
Lower tax burden
The current government has presented two budgets. In the 2014 budget, the basic limit of income exempted from tax for individual taxpayers was raised by Rs.50,000 to Rs.2.5 lakh, and to Rs.3 lakh for those above 60 years. Also, the deduction limit under section 80C (which applies to specified investments and expenses) was raised by Rs.50,000 to Rs.1.5 lakh. The same was done for deduction on interest payment on home loans—limit was raised by Rs.50,000 to Rs.2 lakh under section 24(b).
In the 2015 budget, basic tax slabs stayed unchanged but some deductions and allowances were modified. For instance, deduction for health insurance premium was raised to Rs.25,000 under section 80D (and to Rs.30,000 for senior citizens). Travel allowance limit was doubled to Rs.1,600 a month. Wealth tax was abolished, but surcharge on taxable income above Rs.1 crore was moved up from 10% to 12%. “Wealth tax abolition was a welcome move since the cost of collection was more than the actual tax collections itself,” said Neha Malhotra, manager, Nangia & Co.
All these changes put together mean that a taxpayer can now claim deduction of Rs.4,44,200 compared with Rs.2,64,600 till financial year 2013-14.
The government also tightened the noose around black money by issuing guidelines on use of Permanent Account Number (PAN) for transactions worth more than Rs.1 lakh.
Streamlining of tax laws continued into mutual funds as well.
Taxation of debt funds was brought in line with that for other debt instruments—tax on long-term capital gains was increased from 10% to 20% on transfer of debt fund units. Also, the period of holding to qualify for long-term investment was raised from 12 months to 36 months for this purpose.
The big pension push
While other segments saw smaller changes, the government initiated some big bang reforms in the pension sector. The National Pension System (NPS), a market-linked defined contribution retirement product, got an extra tax deduction of Rs.50,000 under section 80CCD. Under the current rules, 10% of the salary that is invested in NPS is eligible for tax deduction up to an overall limit of Rs.1.5 lakh under section 80C. The added deduction takes this to Rs.2 lakh. For someone in the highest tax bracket of 30.9%, this will mean a tax saving of Rs.61,800.
This move makes NPS more visible as it plucks the product out of the 80C basket. But the fact that the product is taxable on maturity may keep some investors away.
It may, however, be too early to assess the impact of tax incentives. “Growth in number of private subscribers has been 5.15%, while growth in contribution during the period has been 33.66%. We expect better coverage only towards the end of the financial year as most of the changes announced in the budget were tax related, and these shall come to fruition only by the end of financial year,” said the Pension Fund Regulatory and Development Authority in an emailed response.
Another pension product, Employees’ Provident Fund (EPF), which was a default scheme for salaried, was made optional. People can now choose between EPF and NPS, but this will be effective only after an amendment to the relevant Act. So far, an individual had to invest in EPF, and then could opt for NPS, which reduced disposable income. More choice is good, also for EPF. “EPF will want to improve services to retain subscribers. It has already reduced the administration charge for employers from 1.1% to 0.85% of the basic salary,” said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd.
Besides, EPF is now allowed to invest at least 5% of the incremental corpus in equities up to a maximum of 15%. The NPS funds meant for government employees (these allow for up to 15% investment in equity) have given better returns than EPF. For example, the returns for the government employees’ NPS fund has been in the range of 9.91-10.42% since inception in 2008. EPF is currently offering an interest rate of 8.75%.
However, the step has evoked some skepticism. “EPF is an interest bearing product. One can’t account for a variable asset like equity unless you realise the gains. EPF will need to get unitized in order to maintain parity on assets and liabilities,” said Gopal.
Mint Money take
The government has taken steps in the direction of reviving investment, giving relief to individual taxpayers, encouraging savings, and building a financial safety net for households across income categories. Overall, this is a good start and households stand to benefit as the government builds on the foundation it has laid in the past one year.
