This is my first post of current Financial Year :). I never celebrate New Year but being in a Personal Finance space, Financial Year is the New Beginning. Many readers asked me why i have not shared my inputs on Budget 2015. There was a mad race in the financial world to interpret the budget. I thought of sharing my views at the right time. In this economically liberalized era, the impact of a budget is negligible. Most of the provisions of the budget are Pro-Poor and Pro Farmer. The Budget does not make a much financial impact on the lives of a middle class & rich due to economic prosperity. The major reason being, negligible impact in absolute terms on total earnings. Yesterday, i was reading that most of the sectors are offering double-digit hike in salary with an average hike of 12%. Assuming inflation within 6% for the Financial Year, the target set by Govt. The Inflation adjusted hike is 6% for average performance. In this scenario, if service tax is increased from 12.36% to 14% then how many people will stop dining out. I think NO ONE. In fact, with an increase in salary more people will add to this class. The proof is opening of 11 new restaurants in my neighborhood.
Changes from Current Financial Year
1. Increase in Service Tax from 12.36% to 14%: Service Tax is an indirect tax and i always welcome increase in the indirect Tax. From current Financial Year, Service Tax is increased from 12.36% to 14%. Now you must be wondering when everyone is criticizing the same why i am welcoming this move. As i mentioned in my post on Income Tax – A Myopic View that only 3 Cr from approx 11 Cr people who fall into the income tax bucket. If an average tax rate is 20% for 3 Cr but imagine if 11 Cr start paying tax then burden will reduce on these 3 Cr by at least 2/3rd. Tax collection will remain same. In short, Indirect taxes like service tax is the best way to bring more people in tax bucket thus reducing the burden of the direct tax. It will provide room for the cut in direct tax in future.
Some of my friends who are born critics, over exaggerated the impact of increase in service tax from current Financial Year. The best example quoted is an increase in restaurant bill for a middle class. Not many people are aware that Service Tax is not levied on 100% of Restaurant Bill Amount. It is levied only on 40% of the Bill Amount. Therefore increase of 1.64% i.e. 14% – 12.36% is on 40% of total value means increase of only 0.656% on Total value. Assuming a family of 4 dine out 4 times a month with an average bill of Rs 1500. The total impact of an increase in service tax for each month in a financial year will be Rs 39.36 and Rs 472.32 for entire Financial Year. It was quite funny when people were saying this increase will upset their budget and they will cut down on dining expenses. For a financial year, you need not cut no. of dine outs. Only during one of the dine out, out of 48 during the year, please don’t order 1 Starter and 1 Sweet dish that’s it.
Another campaign was on swachh bharat cess of 2%. My friends added that this cess is over and above Service Tax of 14% and declared that final Service Tax will be 16%. Now without going through into the details, this wrong information was circulated. Just to clarify, this Swachh Bharat Cess is not on Total Value but only on Service Tax amount i.e. if 14 Rs Service Tax is paid on Bill Value of 100 Rs then Swachh Bharat Cess will be levied on 14 Rs, not on 100 Rs. Effective Service Tax will be 14.28 Rs, not 16 Rs. Secondly, this cess will be applicable to select services like services offered in 5 star hotels etc. It will not impact middle class or poor people.
2. TDS on Recurring Deposit: Till now, TDS is deducted only on interest from Fixed Deposits but now it will be deducted on Recurring Deposit also. It is being projected as if Recurring Deposit Interest will be taxable and it was tax free till now. The fact of the matter is that Interest Income from Recurring Deposit was always taxable and you were supposed to club it in Interest Income (Income from other sources) and pay Tax. If your income is non-taxable, you can always submit form 15H and 15G for lower or nil deduction of TDS. It’s a non-issue. In my opinion, for transparency purpose TDS should be deducted on all investments.
3. Increase in Health Insurance Limit from Rs 15,000 to Rs 25,000: As i keep highlighting in my posts that India’s health care inflation is one of the highest in the world therefore it is mandatory to have Health Insurance. From this Financial Year, tax deduction u/s 80D on health insurance premium increased from Rs 15,000 to Rs 25,000. For senior citizens, this limit is increased from Rs 20,000 to Rs 30,000 therefore you can claim max tax deduction of Rs 55,000. Very Senior Citizens of above 80 years can claim medical expenditure of up to Rs 30,000 towards medical treatment.
4. EEE Status for Sukanya Samriddhi Account: After PPF (Public Provident Fund), Sukanya Samriddhi Account is the 2nd scheme to receive EEE status from this Financial Year. It means your investment will be tax free at all 3 stages i.e. deposit, accrual of interest and withdrawal. As i mentioned in my post that this scheme is launched with social purpose / message and should not be rated purely from an investment perspective.
5. Wealth Tax is abolished: Wealth Tax was one of the most complicated from compliance / valuation perspective. It’s a welcome step as it will simplify the life of a taxpayer. From my experience, i can say that most of my clients were not paying wealth tax because of a complicated valuation process. The intent was not to avoid tax but to avoid operational hassles in the process. They are happy to pay a surcharge of 2% introduced this Financial Year if their income cross 1 Cr during the Financial Year.
6. PAN is Mandatory for all transactions of more than 1 Lakh: In my opinion, this is the best way to remove black money from the system. In future, this limit will be further reduced to ensure tax compliance. The govt is thinking like tax evaders and also made provision to track split transactions. For example, if i have to buy Gold worth Rs 3 lakh, to avoid quoting PAN i will buy Gold in 4 tranches of Rs 75,000 each. “Unfortunately”, Income Tax will track the tax evader in case of split transactions. Secondly, to remove black money from real estate, cash transaction is restricted to max Rs 20,000 as an advance or Token Money towards the property purchase.
7. Tax Free Infrastructure Bonds: The focus of Govt of India is to develop infrastructure. Infrastructure is key to the revival of an economy. To mop up the funds, Govt announced that during the current financial year it will issue infrastructure bonds worth Rs 20,000 Cr. These bonds are suitable for long term investment and interest is tax free. My clients, who bought Infrastructure bonds in 2013 gained handsome returns and those who ignored my advice are regretting :). The only catch is that don’t expect coupon rates as offered in 2013.
There are lot of other changes from this financial year which i will cover in my future posts. In my opinion, above mentioned 7 changes from this financial year will have a major financial impact from the Personal Finance perspective.
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