'Status-quo' and 'unchanged' are some of the terms that most investors are likely to associate with Union Budget 2007-08. To the relief of investors, the much-feared EET (exempt-exempt-tax) system of taxation did not find place in the Finance Minister's agenda.
Having said that, the Finance Minister did introduce some provisions that will have far-reaching consequences on investors. In this article, we discuss 7 provisions that matter; 5 that will go down well with investors and 2 that will be seen as 'dampeners'. Also we look at the impact, that the aforementioned provisions will have on investors.
First, the 'dampeners':
1. Higher dividend distribution tax
The dividend distribution tax paid by fund houses on dividend payments to debt fund investors has been increased. The same will result in lower dividend receipt for investors. Dividend payouts on liquid funds will attract a tax of 25.00% for individuals and corporates alike. Conversely investments in other (non-liquid) debt funds will attract a dividend distribution tax of 12.50% for individual investors and 20.00% for investments made by corporates.
With short-term fixed deposits offering attractive yields, investors will have to reassess the feasibility of investing in liquid funds vis-à-vis short-term fixed deposits, in light of the new tax regime.
2. Additional cess of 1.00% introduced
An additional cess of 1.00% will be levied on all taxes to fund secondary education and higher education. Presently the cess stands at 2.00%. The same will result in an enhanced tax liability for assessees.
Now for the 5 positive provisions:
1. Threshold limit of exemption for Income Tax increased
The threshold limit of exemption for Income Tax has been raised by Rs 10,000 for all the assessees. In other words, this will lead to a reduction in the tax liability by Rs 1,000. In case of women assessees, the new threshold limit will be Rs 145,000; the same will be Rs 195,000 for senior citizens (leading to relief of Rs 2,000 in the tax liability).
2. Reverse mortgage for senior citizens
National Housing Bank will introduce 'reverse mortgage' under which a senior citizen will be able to avail of monthly income streams by mortgaging a house owned by him. Under such a scheme, the senior citizen will continue to remain the owner of the house and occupy the same throughout his lifetime.
This measure will prove especially useful for senior citizens who own house properties (which tend to be illiquid investments), but are cash-strapped and need liquidity to meet their day-today needs.
3. Tax benefits on medical insurance hiked
Premium payments towards medical insurance are eligible for deduction under Section 80D; the designated amount at present is Rs 10,000 (Rs 15,000 for senior citizens). The eligible amount for the purpose of deduction now stands enhanced to Rs 15,000 (Rs 20,000 for senior citizens).
Individuals now have one more reason to opt for medical insurance, which in any case is a vital tool in one's insurance portfolio.
4. Exemption for Banking Cash Transactions Tax hiked
The exemption for Banking Cash Transactions Tax now stands hiked from Rs 25,000 to Rs 50,000. In effect, individuals and HUFs will now be able to withdraw Rs 50,000 from their bank accounts without any tax implications.
5. Section 54EC limit unchanged
The limit of Rs 5,000,000 (Rs 5 million) per investor, per year for the purpose of claiming exemption from capital gains tax remains unchanged.
Barring the introduction of additional cess and higher dividend distribution tax, investors have much to cheer about. The enhanced tax benefit on medical insurance and introduction of reverse mortgage for senior citizens in particular, stand out as commendable features.
The Finance Minister certainly deserves a "high five" for the fiver!
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