Leading With The Leash

After having weathered two years of back-breaking inflation, the aam aadmi doesn’t quite know whether the recent trend of abating prices is for real. Will this lull—and the fresh options served up by Budget 2012—prompt some to firm up on investment planning for the future?

Outlook Money offers a primer to make the most of these testing times.

Investment Advice

Real Estate

Proposal: Allow external commercial borrowings (ECBs) for low-cost affordable housing projects. Setting up of the Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans.

Impact: The enhanced limit will benefit people in the lower income groups. But, purchasing affordable property in metros where prices are unreasonable will force consumers to the suburbs. Look for value deals.

Proposal: Extension of 1 per cent interest subvention on housing loans up to Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh for another year.

Impact: Helps people with lower incomes to buy houses.

Banking

Proposal: Setting up of a credit guarantee fund for better flow of education loans.

Impact: The credit guarantee fund will help banks curtail NPAs in their education loan portfolios. It should make it easier for students to access education loans.

Proposal: Tax-free bonds for financing infrastructure projects have been doubled from Rs 30,000 crore to Rs 60,000 crore.

Impact: More options to invest in tax-free bonds where the interest income will not be taxable.
Proposal: A central Know Your Customer (KYC) depository will be developed in 2012-13 to avoid multiplicity of registration and data upkeep.

Impact: This will eliminate the need for multiple KYC processes.

Stocks & Sectors

“Market expectations for a drop in interest rate are running ahead of reality. Government borrowings will remain aggressive and it will keep putting pressure on interest rates.”

K.V.S. Manian
Group head, consumer banking
Kotak Mahindra Bank

Proposal: A new equity saving scheme named Rajiv Gandhi Equity Saving Scheme for new investors with annual income of up to Rs 10 lakh. Investors will be allowed 50 per cent tax deduction with an annual investment limit of Rs 50,000. The scheme will have a three year lock-in.

Impact: Details are awaited, but it should boost retail participation in the equity market along with a tax rebate.

Proposal: Rs 15,888 crore for capitalisation of public sector banks, regional rural banks and other financial institutions. Creating a financial holding company that will raise resources to meet the capital requirements of public sector banks.

Impact: PSU banks will be able to fund expansion and meet Basel norms. However, higher deficit and higher bond yields will affect treasury income.

Proposal: Coal India to sign fuel supply agreements with power plants that have entered into long-term power purchase agreements. ECBs to part-finance rupee debt of existing power projects. Full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal for a period of two years till March 31, 2014.

Impact: Higher targeted amount of tax-free bonds will help financing of infrastructure projects with long-term money. Addressing the issue of fuel supply in the power sector should help the power generation companies.

Proposal: ECBs for working capital requirements of the airline industry for a period of one year, subject to a total ceiling of $1 billion. Import of aircraft parts exempt from basic customs duty.

Impact: Will help the airline industry raise money at cheaper cost, even for working capital requirements (provided foreign banks agree to fund them). Direct import of air turbine fuel has already been allowed.

Proposal: Excise duty and service tax increased by two per cent.

Impact: Negative for roughly all companies selling goods and services to the consumer. Costs of goods and services will go up for consumers—in competitive segments, it will put greater stress on the books of companies. However, exemption on income tax and higher allocation to rural areas will impact demand but higher prices may act as deterrent.

Gold

“This should have a negative impact on demand. Given that India is one of the largest consumers of gold, a fall in demand should lead to a fall in gold prices.”

Sandip Sabharwal
CEO-PMS
Prabhudas Lilladhar

Proposal: Hike in the customs duty for gold from 2 per cent to 4 per cent. A central excise duty of 1 per cent has been levied on unbranded gold jewellery.

Impact: Both branded and unbranded jewellery to be costlier. Gold ETFs will become expensive as well. However, demand might remain unchanged due to the recent fall in gold price.

Life Insurance

Proposal: To claim tax deduction under section 80C and for receiving tax-free proceeds under a life insurance policy, the premium payable should be 10 per cent of the sum assured.

Impact: More cover at lower premiums will encourage long-term contracts. However, insurance for older people wanting to buy new policies likely to get more expensive.

Proposal: Increase in service tax from 10 to 12 per cent for unit-linked and term insurance policies. For traditional policies, tax up from 1.5 to 3 per cent.

Impact: Increased cost burden will be passed on to policyholders.

Proposal: The onset age to qualify as senior citizens reduced to 60 years for claiming deduction for health insurance u/s 80D.

Impact: Senior citizens can now claim additional benefits from the age of 60 on.

Personal Taxes

“The change in tax slabs is not significant. Moreover, it will get compensated against increase in consumption taxes such as service tax and excise duty.”

Mukesh Butani
Chairman
BMR Advisors

“The equity saving scheme is a clear positive for the equity market and will increase long-term investor participation. The reduction in stt on delivery by 20 per cent will add to investor returns.”

Nimesh Shah
MD & CEO
ICICI Prudential MF

Proposal: The income-tax exemption limit has been raised from Rs 1.80 lakh to Rs 2 lakh. The limit for women taxpayers also moves up from Rs 1.9 lakh to Rs 2 lakh. Thus tax category for men and women merged.

Impact: This translates into a straight savings of Rs 2,000 for men and Rs 1,000 for women for income level up to Rs 2 lakh. For all taxpayers with income of Rs 10 lakh and above, in addition to Rs 2,000 and Rs 1,000 for men and women who are not senior citizens, the total savings translates into Rs 22,000 and Rs 21,000 respectively.

Proposal: Individual taxpayers will get a deduction of Rs 10,000 on the interest from savings bank accounts.

Impact: This will help a large number of small taxpayers, especially those with income up to Rs 5 lakh as they will not be required to file income-tax returns.

Proposal: Within the existing limit for deduction allowed for health insurance, it is proposed to allow a deduction of up to Rs 5,000 for preventive health check-up.

Impact: Under section 80 D, the maximum deduction is up to Rs 15,000 for self, spouse and family. The health check-up costs now come within the fold.

Proposal: Exempt capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing sme company for purchase of new plant and machinery.

Impact: In addition to putting capital gains into capital gains savings bonds or in a new house property, now this new avenue exists.

Disclaimer: Outlook and Outlook Money do not accept responsibility for any investment decision taken by readers on the basis of information given here. The objective is to keep readers better informed and help them decide for themselves.

Year Gone By, Financially

Note: * Inflation figures are for Feb ’12 and Jan ’11 respectively 1. Retail price in Delhi 2. Price of Indane gas (14.2 kg) in Delhi 3. Price in rupee per sq ft for 2BHK in (Ambattur) Chennai 4. Lowest EMI for floating home loan of 20 years (non-teaser) 5. Average price of a gold class multiplex ticket in Mumbai 6. Top 3 companies in BSE sensex.

Source: Annual Economic Survey, www.iocl.com, www.fcamin.nic.in, www.mcxindia.com, www.bseindia.com