The Budget: how it affects you and me!

But nothing makes sense unless it impacts you, right?

So let us tackle the most relevant question: how does the Budget affect you and me?

~ Income tax rates

The most obvious way in which the Budget affects us is by any change in the income tax structure.

Keep your eyes peeled for any change in the income tax rate or in the income slabs.

To learn more about the current income tax rates for various tax slabs and how they are calculated,click here!

~ Income tax rebates

i. Women, keep your eyes and ears open. Female tax payers get a rebate up to Rs 5,000 or the amount of tax to be paid, whichever is lower.

ii. Senior citizens like your parents get a rebate up to Rs 20,000 or the amount of tax to be paid, whichever is lower.

In addition to the above, a number of investments are entitled to a rebate under Section 88 of the Income Tax Act.

To understand what a rebate is, the percentage of rebate offered for each income slab, and what falls under Section 88, read Smart tax-saving solutions!

~ Standard deduction

If you are a salaried employee, look for changes in the standard deduction. A standard deduction is the base amount of income that is not subject to tax. This benefit is given to salaried employees.

i. If the income from salary does not exceed Rs 150,000, a standard deduction of one-third of the salary or Rs 30,000, whichever is less, is granted.

ii. If the income from salary exceeds Rs 150,000, but not Rs 300,000, the standard deduction is Rs 25,000.

iii. If the income from salary exceeds Rs 300,000, but not Rs 500,000, the standard deduction is Rs 20,000.

i. If you are repaying a home loan, interest on borrowed capital (your home loan) is deductible up to Rs 150,000.

ii. The principal repayment of the borrowed capital (loan repayment, and not interest payment), is eligible for rebate upto Rs 20,000 under Section 88.

iii. The maximum amount of premium paid on your medical insurance to be considered for deduction is Rs 10,000. For a senior citizen (above 65 years), it is Rs 15,000.

iv. For investments in pension plans, deduction is available for a maximum investment of Rs 10,000.

Please watch out for any changes on this front.

Look out also for any change in the way the government taxes dividends.

At the moment, for example, dividends from companies and equity mutual funds are exempt from tax.

Also, you pay no capital gain tax on shares if you sell them after a year.

If you sell them before a year, you pay a short-term capital gain tax of 10%.

The manufacturer of the goods has to pay some taxes, the most common being excise duties and import duties.

Such taxes are called indirect taxes because, even though the manufacturer pays them, he passes them on to the consumer (you and me).

The prices of the goods will factor in these taxes.

If the taxes decrease, the manufacturer may or may not pass on the benefit to the buyers in the form of a lower price.

If the taxes increase, chances are he will increase the prices of the goods.

Obviously, the consumer benefits if reductions in duties are passed on to him and increases are not.

This usually happens in intensely competitive industries like Fast Moving Consumer Goods, or what is referred to as the FMCG industry.

In less competitive industries like cement, companies usually pass on higher indirect taxes to consumers by raising prices.

The Budget will not directly raise interest rates.

This is how interest rates rise: the finance minister will talk of a fiscal deficit. This refers to the gap between the money the government has received (government revenue), and the amount that it has spent (government expenditure).

There are two ways to bridge this gap:

1. The government can print more notes.

Being the lawmaker of the land, it can direct the central bank -- the Reserve Bank of India -- to print more currency. This is called monetisation.

May be simple, but it results in an increase in the money supply and often results in inflation.

Thankfully, the government excerises great caution and restraint when resorting to this option.

Inflation increases the price of goods.

What costs Rs 10 now would cost Rs 100 in, say, 10 years. This will result in increased interest rates.

Let's say the bank gives you the home loan at 9% per annum interest. This is called nominal interest.

Let's also say that inflation is currently at 7% per annum. This means the real interest the bank earns is just 2% (9 minus 7).

As inflation increases, the bank will also increase its nominal interest rate so that the 'real' interest rate it earns stays somewhat constant.

As inflation rises, interest rates are likely to rise as well. This means the interest rates on any loan you take will increase. So if you plan to borrow, this is bad news.

To get hold of your money, all banks and companies offering fixed-return investments, like fixed deposits and bonds, will pay you more. This way, you get a higher rate of interest.

2. The government can borrow from the market.

Incidentally, the government is the largest borrower in India.

Since the government is such a large borrower, its demand for money could put an upward pressure on interest rates.

And if interest rates rise, the same argument as above is applied here.

Let's wait and see!

As you can see, the Budget is not just an economic exercise for academicians. It impacts all of us.

Plenty of income tax concessions, a low fiscal deficit and higher capital spending (on infrastructure), are all bullish signs.

Here's awaiting Budget 2005!

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