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Budget 2020: Tax cut without tax saving could give you more money to spend

More money in consumers’ hands by way of a tax cut and no need for tax-saving means more money for consumption

Published: 03rd February 2020 03:37 AM  |   Last Updated: 03rd February 2020 12:19 PM   |  A+A-

Ahead of the Union Budget 2020-21, there was an air of expectations. You thought the Union government would provide relief on long-term capital gains tax or cut personal income-tax or remove the securities transaction tax on market investments to kick-start the economy. The hope was that the government would put more money in your hands so that you can spend it. 

However, the budget has not done away with any taxes. There is no significant cut in taxes for individuals. At least, not the way you thought it would be.  The message from the budget is clear. Taxes are the only reality for any income you earn. In that context, no new taxes should be a significant relief for individuals navigating the wonderland of investments and personal finance in the budget. 

New tax regime: When you are young and negotiating your salary, a common question you ask is about the salary you get in your hand. That is the net of all deductions for taxes and other mandatory savings. The idea of the salary negotiation is to ensure that you get more money in your hands. 

Budget 2020 gives you an option. You can choose to pay less tax and not invest in any tax-saving instrument. Effectively, you have more money in your hand to spend. A lot of youngsters are known to spend more than they save. More money in the hands of consumers by way of a tax cut and no need for tax-saving means more money for consumption. There is a good chance that urban India may witness a sharp surge in consumer spending. While the government has decided to forego revenue, it may get that money back through indirect taxes like the Goods and Services Tax (GST).  

The idea of putting more money in the hands of the salaried is so good that it rattled investors in insurance companies on Saturday. A lot of insurance products are sold as tax-saving instruments.

The selling pressure in insurance company shares soon after the budget announcement showed the extent to which tax planning and insurance buying is connected.

If individuals choose to pay tax in the new regime and not invest or save money, that is terrible news for the future business of insurance companies. 

In a way, the government action makes a significant point. It nudges people to buy insurance for protection and not for investment. This column has always advocated the need to purchase insurance coverage only for protection.

Provident funds, pension funds made unattractive: Tax breaks on long-term savings were a significant attraction to the salaried classes. However, the budget proposes to tax promoter contribution exceeding Rs 7,50,000 per annum. If you go through the changes proposed in the finance bill, you may realise that the government is shaking up the ‘savings’ culture. That is a bold move in the context of a slump in household financial savings over the past few years. It appears that the government wants you to focus on ‘investing’ and ‘spending’ rather than ‘saving’ money.

Dividend income issue: The other significant thing is for people dependent on the dividend income. So far, your dividend was not taxed in your hands. The company paid tax before distributing it. 

Going forward, you will have to add the dividend income to your overall income and pay the applicable tax according to your income slab. For the super-rich, the burden on the dividend income would be 44 per cent, including the cess. You may have to figure out a new way to save tax now.  

Share buyback to get popular: The messaging about taxation is so loud, and it does not spare non-resident Indians (NRI). The government has also decided to tax non-residents living in tax havens like Dubai or any other zero-tax destination.

The message is loud and clear that India is not a tax haven and no income can go without taxation. Amidst all that, buyback of shares may become widespread. There is no tax if you sell your shares back to a company in a buyback offer. Cash-rich companies that announce high dividends regularly may announce a buyback of shares instead of paying the dividend.(The writer is editor-in-chief at www.moneyminute.in)



Comments(1)

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  • rohan

    Cutting the branch on which one is sitting
    2 years ago reply
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