The Give And Take Guide

After a couple of scary years, taxpayers got some good news in Budget 2010. But for many, life beyond the rising price line remains the biggest cause of concern. So, as an investor, what should your strategy be? This primer from Outlook Money should make clear how the budget proposals  impact you—and will hopefully present a plan for life after Budget 2010.

Insurance

Service Tax & Ulips Charges: Instead of paying a service tax on all the charges, you will now only have to pay a service tax towards the fund management charges which is restricted to Rs 1.35 for every Rs 100 invested.

Impact: With the service tax reduced, the amount that you invest will go up. So the returns from a larger invested amount go up as well. Insurance experts suggest that there could be an increase of about five per cent in the fund value.

Health Insurance Check Ups: The service tax applicable on the amount spent on health check-ups for employees at hospitals will mean that you will either have a lower coverage or your employer will have to pay more money towards the service.

Impact: Be prepared to increase your coverage individually or to pay a higher percentage to your employer as your contribution to health. Already, many employers are asking employees to share health insurance costs.

Cashless Tax: Providing cashless medical facilities is now a service, which attracts a tax provided it is paid directly from the insurance company to the hospital or nursing home. Any portion paid by the individual doesn't attract the service tax.

Impact: Either the insurance company passes on the burden of the tax to you, in which case your premium just went up by 10.3 per cent, or the coverage you are currently getting gets reduced somewhat.

Gold

More Expensive: Tucked in the budget proposal is a small hike in customs rates from Rs 200/10 grams to Rs 300/10 grams.

Impact: An increase in gold prices by Rs 100/10 grams. Gold etfs, which are mostly traded per gram, will spike up by Rs 10 per unit. If you are looking at gold as an investment, keep it to a maximum of 10 per cent of your portfolio and buy into gold exchange traded funds, as this eliminates the cost of storage.

Real estate

Builder Tax: Service tax now applicable on construction services to the prospective buyer (if the service is provided before completion of construction). The builder will therefore now pay service tax on construction activity.

Impact: Higher prices for properties under construction. While ready-to-move properties were already at a premium compared to under-construction flats, the price gap is expected to go up further. Looking to buy a flat? Ready-to-move-in makes more sense.

Interest Subsidy: One per cent subsidy on a loan up to Rs 10 lakh for a property costing up to Rs 20 lakh.

Impact: Will help buyers in a house in tier-II and tier-III locations provided you have invested well and are able to generate 50 per cent of the property amount on your own.

IT Exemption: Extension of income tax exemption for housing projects by one year. These projects have to be sanctioned on or before March 31, 2008, and completed in 5 years. This will provide relief to the many projects delayed during the slump.

Stocks & MFs

Thanks to positive global cues and a budget that didn't surprise, the markets have generally been happy. Sectors like auto and pharmaceuticals will benefit from the increased weighted deduction on r&d spend. For auto, the negative impact from increased excise duty will be passed on to consumers. The excise duty and mat hike is negative for the cement sector, implying price increases as well as an impact on bottomlines. For fmcg companies, revised tax slabs should result in consumption. However, prices of certain goods will rise on account of the excise duty rollback. Banks see a positive impact, largely through the recapitalisation of weak psu banks and interest subvention.

Mutual funds: There are no specific tax announcements for the mutual fund industry so there's no real change in the way you allocate funds to this segment. However, given the impetus to infrastructure in the budget, thematic funds should look attractive.

Tax Slabs & Additional Investment Avenues

By expanding the tax slab, the finance minister has allowed more savings in the hands of people earning higher amounts of money. The tax slab revision has no benefit to people earning below Rs 3 lakh and a larger benefit to people earning above Rs 8 lakh (see table). Tax experts say that while this bodes well for the consumption story, it is actually counter-productive because it does not end up putting more money in the hands of low-income households.

Under 80CCF, the finance minister is allowing an additional investment avenue in the form of investments in long-term infrastructure bonds. The savings to those who have maximised their Rs 1-lakh limit under 80C could be around Rs 6,000. However, it remains to be seen what or which institutes issue these bonds, whether returns will be taxed, tied to a lock-in period and so on before one can ascertain the attractiveness of these bonds as a viable investment opportunity.

NPS For The Unorganised Sector

The one big idea in the budget is a form of social security network for India's large unorganised workforce. If an account is opened with the New Pension Scheme in 2010-11, with a minimum annual contribution of Rs 1,000 up to a maximum of Rs 12,000, the government promises to supplement the amount by Rs 1,000 for three years. The FM has also asked the states to come forward to match this amount. For a scheme that has not had a great start so far (and we're being kind here), the budget proposal is likely to provide a much-needed boost to NPS. More importantly, this is one target audience—estimated at over 400 million—that really needs a nest egg.

Year Gone By, Financially

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.