Every year after the Budget is presented, investors take calculate their gains and losses from the Budget proposals, and plan theirinvestmentsaccordingly.Thisyearis no different. Investors will gain from some proposals while they stand to lose from some others, financial planners and advisers said.
Two of the Budget proposals which could help investors save and invest more are the hike in income tax exemption limit from Rs 2 lakh to Rs 2.5 lakh and also the increase in section 80C limit of Income Tax Act to Rs 1.5 lakh. Together, these two incentives are expected to help investors save and invest more as they will have more disposable income in hand. “It’s a good incentive to save money. So investors should ensure that they invest these extra funds correctly,” said Mukund Seshadri, founder, MSVentures Finan- cial Planners. Financial advisers said that the extra funds should be invested in line with the risk taking ability of the investor.
The finance minister also made some changes to the Income Tax Act that have left fixed maturity plans (FMPs) unattractive to investors, and have taken away the advantages FMPs had over bank fixed deposits, mainly the one and two years plans. How- ever, a top official with a fund house said that inves- tors should check with their tax consultants or fi- nancial planners if they should keep money in FMPs or not. “In some cases they may even be at a slight tax advantage over FDs,” the official said. According to Seshadri, all Debt fund investors should consult their planners, advisers, tax planners to review their investments and tax incidence on the same under the new taxation rules.
FMP investments by HNIs and corporates, how- ever, will not make sense anymore. Most of the banks offer higher FD rates for large deposits from corpo- rates, called bulk deposits. Now when one compares bulk deposit rates and FMP rates, unlike earlier tax regime, the latter will not enjoy any advantage under the new taxation rules. Moreover, FMPs are more illiquid compared to FDs. So corporates are unlikely to gain anything by keeping money in FMPs. Even those non-FMP funds, which used to offer daily and weekly dividends, and similar other plans, will not be attractive anymore, the official said.
As a result of the tax changes, some of the fund houses which had launched FMPs recently have started returning money to investors as these are not attractive anymore. Industry officials also believe that the tax law changes could also force fund houses to long, to increase their asset size fund houses were used to target corporates for their Debt investments, which will change now, the industry official said.
For investors looking at long-term investments, the growth options in Debt funds are still attractive, as they offer some advantages over FDs and bank deposits. One of the advantages is the no tax inci- dence falls on investors when they reinvest in the same fund. But banks usually cut TDS when a de- posit is rolled over, the fund house official said.
Another positive is a benefit to home loan bor- rowers – the cap on interest component eligible for tax rebate has been increased to Rs to 2 lakh from Rs 1.5 lakh. This announcement will help the salaried class significantly, especially in the Tier II towns putting in between Rs 25 lakh and Rs 50 lakh to buy a house, industry players said. “The implications can be further understood if a homebuyer takes a loan of Rs 20 lakh for 20 years tenure at 10.15%, the EMI will be Rs 19,500 out of which the total interest payable in the first year is Rs 2,01,517,” said Sukan- ya Kumar, founder & director, Retaillending.com. “Now since the tax benefit has increased to Rs 2 lakh, this person can claim almost all of it and save Rs 61,800,” Kumar said. This higher limit could also be an encouragement for the realty industry in the de- veloping cities, leading to a substantial rise in invest- ments in properties and home loans, Kumar said.