Every year, finance ministers present a budget that is watched by millions across the country. Although it is only an account statement, it is used by successive governments as an annual ‘state of the economy’ release. India is perhaps the only country where there is such a widespread hype around an account statement.
The interim Budget 2019-20 is also a similar exercise. Finance minister Piyush Goyal highlighted the string of measures taken over the past five years since the government took office. He also outlined a vision statement and ideas for the next 10 years.
Outside of this razzmatazz of political one-upmanship, budget speeches are a treasure of information. They mean a lot for your money in the year ahead.
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If you understand the concept of the taxable income, you will be able to make sense of how it affects your income. After taking into account all deductions for your investments, insurance, medical bills for senior citizens and other things, if your taxable income is up to Rs 5,00,000, then you will pay no tax.
However, if your income crosses that limit, old progressive tax rates apply. This means, for someone with a taxable income of Rs 6,00,000, old tax rates will apply. So, between Rs 2.5 lakh and Rs 5 lakh, you will pay 5 per cent tax and the balance Rs 1 lakh would be taxed at 20 per cent. The budget clearly has taken a stance to favour the low-income households with the review in tax rates.
For those in the middle to the high-income category, there are other things. Over the past several years, successive budgets have encouraged long-term savings in financial assets by the middle-class.
The strong trend of growth in capital markets and gains generated resulted in the government bringing back the long-term capital gains tax last year. There was a demand that it should be abolished. However, the government has not done that.
The government has instead given a boost to the real estate investment. You can now invest up to `2 crore capital gains made by selling the property and invest in two houses. Earlier, only one residential property was permitted. This is likely to spur investment in the real estate market that is reeling currently.
If you are dependent on the rental income, you get some relief too. The tax would be deducted only if your rent is over Rs 2,40,000 per annum.
A lot of senior citizens would benefit from tax proposals and relief in the rent. Many of them rely on fixed deposit interest rates too. The budget also eased the TDS on FD interest to Rs 40,000 from Rs 10,000 currently. Those with fixed deposits up to Rs 5,00,000 can stop worrying about TDS and refund problems.
All these measures are most likely to reduce the risk appetite of the middle class. They may see value in real estate once again. Yet, the budget is expected to leave more money in the hands of individuals. It is an excellent opportunity for those with a taxable income of up to Rs 5,00,000 to invest more.
What next for investing
One must not forget those individual tax proposals will take effect only after a full budget is presented by the new government after general elections in May 2019. However, chances of the next government reversing these proposals are remote. So, if we assume more money in the hands of individuals as a result of the budget, it presents an excellent opportunity for those starting to invest. The budget document indicates that interest rates are expected to remain firm. This is because a higher government borrowing would put pressure on interest rates.
At the same time, the government has promised higher support prices to farmers. Food inflation is likely to remain a key variable. This will not allow the Reserve Bank of India to bring down the borrowing rates. Fixed income instruments are unlikely to give any significant results as a result. Individuals should not move away from investing long-term money into equity assets.
The budget gives a boost to rural and urban consumption. If people will not invest, they will spend. Last Friday, the NSE and BSE sectoral indices like the consumer, real estate, auto outperformed the broader benchmark like the Sensex or the Nifty. As an investor, you can buy these businesses that sell goods and services to Indian rural and urban consumers directly or through mutual funds.