Budget 2016: How it affects your pocket- Business News

Budget 2016: How it affects your pocket

Cesses will make many services expensive, but the real hit may be the tax on EPF, though there is no clarity on this front yet.

  • New Delhi,  March 11, 2016  
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By the time Finance Minister Arun Jaitley's Budget speech ended, hopes of millions of tax payers were dashed. While not many were expecting a change in tax slabs, there were many who were looking forward to a rise in the Rs 1,50,000 deduction limit under Section 80C. None of this happened. The middle class did not get any major tax benefits. On the contrary, more cesses were announced.

For instance, with the levy of 0.5 per cent Krishi Kalyan cess on all taxable services (the service tax rate is 15 per cent), a large number of things, from eating out to gym membership, will become costlier. Not only restaurant bills, even readymade and branded garments of more than Rs 1,000 will become more expensive.

So, the next time you go out shopping, check the price tag to save on taxes. That's not all. With the government working towards a mega sale of mobile spectrum, for which telecom companies will have to pay a huge amount, you may need to pay more for phone calls as well.

Besides, the Budget imposed an infrastructure cess on cars and sports utility vehicles or SUVs. The cess would be 1 per cent on small petrol/LPG/CNG cars, 2.5 per cent on diesel cars of certain capacity (up to 1,500cc) and 4 per cent on still higher engine capacity vehicles and SUVs.

Estimates indicate that the price increase for cars priced less than Rs 10 lakh would be between Rs 3,000 and Rs 45,000. Luxury cars could become expensive by a few lakhs. One can argue that these changes will not push up the cost of living substantially but middle-class families, already struggling with low salary hikes and high inflation, may find the transition a bit painful. It's not only the middle class.

Even those with loads of money have been hit. The Budget has announced an additional dividend distribution tax (DDT) of 10 per cent on those earning annual dividend of Rs 10 lakh or more. This will lower returns from investments. Surcharge for the super rich (income of more than Rs 1 crore) has also been increased from 12 per cent to 15 per cent. Only the small taxpayers have got something to cheer about.

For example, tax rebate for those earning up to Rs 5 lakh a year has been increased from Rs 2,000 to Rs 5,000. You can also save more if you live in a rented house and do not get house rent allowance as the deduction limit in such a case has been increased from Rs 24,000 to Rs 60,000 per annum under Section 80GG.

There is also an additional deduction of Rs 50,000 on interest on loans up to Rs 35 lakh if you are a fi rst-time buyer (See Changes in Personal Taxation). It is not just your short-term plans that are going to get affected. Changes in employee provident fund (EPF), New Pension Scheme (NPS) and sovereign gold bond rules might affect your long-term plans too. You will also get the option of investing in tax-free bonds.


There has been a lot of confusion around EPF. According to the proposals, under EPF, you will have two options at retirement -

1) withdraw the whole amount

2) withdraw 40 per cent and use the rest (60 per cent) to buy annuity. In the first option, tax will be levied on 60 per cent, and 40 per cent will be tax-free. If you annuitise 60 per cent and take it as pension for post retirement years, there will be no tax on the entire amount.

Pension payments are taxable in the hands of individuals. However, there is no clarity on the amount on which the tax will be calculated. Will it be just on interest or both principal and interest? Considering the conflicting statements from the finance ministry, it would be best to wait for further clarification.

Another point of contention is: will the tax be imposed on employer's contribution, employee's contribution, or both?

Experts say if the government goes ahead with the tax on interest accrued after April 2016, a person could lose 18 per cent retirement savings at maturity. But remember that the rules will apply only on corpus accumulated after April 1, 2016. The Budget also proposes to cap the annual employer contribution to EPF at Rs 1.5 lakh per year. At present, there is no limit. However, these changes are only for EPF and not public provident fund (PPF). But is there a rationale for this?

For a long time, there have been demands that the NPS be brought on a par with other retirement products, which means making it tax-free at withdrawal. Instead of giving complete exemption to NPS, the finance minister has made just 40 per cent NPS withdrawal amount tax-free. Now, other retirement products such as EPF and superannuation funds have to fall in line with the NPS. This restriction, however, is not for employees whose monthly salary does not exceed Rs 15,000.

Kulin Patel, Director, Willis Towers Watson India, says, "This is a measure that has surprised many. However, request for a level-playing fi eld has been made many times before. The debate about EET or EEE has been answered well by making all the plans EE & 60 per cent".

The aim of these changes is to encourage people to opt for NPS. The scheme has failed to catch the fancy of corporate employees and voluntary subscribers for whom it was thrown open in 2009. The NPS was launched in 2009 to cover millions not eligible for pension. It is one of the lowest cost retirement products with fund management charges as low as 0.01 per cent.

At the moment, NPS subscribers have to compulsorily buy annuity for at least 40 per cent of the corpus, with an option to withdraw the remaining sum. The withdrawal sum is taxed as per the applicable income tax slab. The annuity payments are taxed in the hands of the individual.

Also, last year's Budget had proposed to give salaried people the option to choose between EPF and NPS. It was also proposed to make EPF non-mandatory. But the government has not yet come out with further instructions on how employees can choose between the two, making the situation unclear. Experts say it is A matter of time before companies start giving this choice to their employees.

The Economic Survey, too, stated that small savings schemes such as PPF are contributing to the subsidies extended to the well-off. The survey argues that savings schemes should follow the EET (Exempt, Exempt, Tax) model.

We spoke to two families about what they make of the Budget and how their finances will be affected post April 2016.

CASE STUDY 1 Family Background: The first family we talked to has six members. Husband and wife, both working, dependent parents and two kids. Given that Ritesh Taparia is a chartered accountant, the financial decisions are taken in-house, without the assistance of a financial planner.

Expectations: At the start of the conversation, the family said it was looking for an upward revision in tax slabs. The other expectation was enhanced rebate on home loan instalments. Given the high cost of living, the family was looking forward to tax concessions so that they can save more money.

Budget 2016 Effect: The family's main worry is the introduction of various new cesses in the Budget. Though small, the sheer range on which they have been applied, especially shopping and fine dining, that is worrying. The biggest grouse of Prachi Taparia, Ritesh's wife, is the introduction of excise on ready-made products of Rs 1,000 or more. This will push up prices of branded clothes by 3-5 per cent, which is sure to pinch pockets. "These days hardly any branded apparel is available for less than Rs 1,000," she says. The other point was introduction of the Krishi Kalyan Cess of 0.5 per cent on all taxable services, effective from June 1.

This is in addition to the recent Swachh Bharat Cess. As a result, the effective tax rate now stands at 15 per cent. "This has made everything from restaurant bills to air travel more expensive," says Ritesh. In the same breath, he hopes that the money collected as cess is used for its mandated purpose and not otherwise.

Even though the family is not planning to change the vehicle in the near future, the infrastructure cess has come as a dampener. As not a single class of vehicle has been exempted, Taparias are of the view that this will make them think twice before they buy a new vehicle.

However, they are quick to add that if the government manages to push through reforms, it may help corporate India, which will lead to better salary increases. "A salary rise will be good for everyone and will consequently raise the standard of living. In such a scenario, these hikes can be easily taken in their stride," says Ritesh. On investments, the only concern is taxability of the employee provident fund. The family is hoping that the exempt status continues. No tinkering with long-term capital gains tax is a relief as the family has a sizeable exposure to market-related products.

CASE STUDY 2 Family Background: The second family has six members - Suprabhat Karati, his wife, parents and two kids. Their income source is a small steel product-related factory that Karati runs.

Expectations: Reduction in property and service tax

Budget 2016 Impact: Karati is disappointed with the infrastructure cess as he was planning to buy a diesel Scorpio for which he will have to pay an additional 2.5 per cent by way of cess now. "The government should increase tax on luxurious cars and not small cars." He plans to continue using his current Maruti Alto in the near future.

The Krishi Kalyan Cess of 0.5 per cent is another pain point as it will be levied on all services such as buying property/insurance as well as phone bill payments, to name a few. His phone bills are quite high and set to balloon in the coming days.

His wife, Anwesha, who loves imitation jewellery, is unhappy about the increase in customs duty on jewellery and 2 per cent excise duty on branded garments priced more than Rs 1,000. Suprabhat rues, "Any branded shirt is bound to cost more than Rs 1,000. There is hardly any option to escape this." Both husband and wife conceded they may have to think twice before shopping. Because of these changes, Karatis are not particularly happy about the Budget.

They expect their bills to rise in the coming days. They are also unhappy with the lack of incentives for companies in the beleaguered metal space. When it comes to investments, they have no exposure to any pension-related product like the NPS and are happy about the same.

This is due to lack of fl exibility about how the money saved can be used. Given that no added incentive has been given to any investment class, he says there is no need to relook at the portfolio.

By Jinsy Mathew and Sarabjeet Kaur

This means that contribution and interest should be exempt while the maturity amount should be taxed at withdrawal. In PPF, all the three components are exempt from tax at present.


The government has made it clear that the entire EPF amount will be tax-free if you buy annuity on retirement. But remember that you can just defer tax as pension received later will be taxable. Since you will need income after retirement, it is good to create an income stream using the annuity option.

You should also start investing in NPS for retirement, especially after the proposed changes. Surya Bhatia, a New-Delhi based fi nancial planner, says, "After all the changes, NPS has become more tax-efficient. It allows you to participate in equities.On maturity, the annuity allows deferment of tax."

Lovaii Navlakhi, Founder and CEO, International Money Matters, agrees. "NPS is better now. It invests your money in equities and has additional tax benefi ts." He says you can claim three benefi ts under NPS. First, you can claim deduction of Rs 1.5 lakh under Section 80CCD. The, there is a second additional deduction of Rs 50,000 under Section 80CCD (1B). Third, you can also get tax benefi ts on corporate NPS. Here, the employer's contribution up to 10 per cent of basic plus dearness allowance is eligible for deduction under Section 80CCE, over and above the Rs 1.5 lakh limit.


With the government making a big push for infrastructure, we expect a lot of tax-free bonds to hit the market. In the Budget speech, the finance minister said that the National Highways Authority of India can raise tax-free bonds of Rs 15,000 crore. Although these bonds are tax-free, they are not eligible for deduction under Section 80C of the Income Tax Act.

Moreover, short-term capital gains are taxed at normal income tax rates, while long-term capital gains (from sale of bonds after more than one year) are taxed at 10 per cent after indexation (adjustment of purchase price with infl ation, which lowers gains and, hence, the tax burden too). What to do? The tax-free component makes these bonds attractive, especially for those in higher tax brackets. Suresh Sadagopan, Founder, Ladder7 Financial Advisories, says: "Tax-free bonds offer safety and tax efficiency. They gives you an option to lock-in money at a fi xed rate for 10, 15 and 20 years. You can expect stable return in the long run."


The Budget has also proposed that the redemption of sovereign gold bonds (SGBs) be not treated as transfer and, therefore, be exempted from capital gains tax. This is proposed to be made effective from April 1, 2017. The scheme allows you to invest in gold in paper form. The bonds are denominated in multiples of grams (basic unit is one gram). At the time of exiting the scheme, you will be paid for the number of units bought based on prevailing prices.

What to do? With capital gains tax exemption, SGB has become attractive. Experts say one should invest at least 10-15 per cent of the portfolio in gold. But one should be aware of a few things. For example, the investor has to buy SGB at a predetermined rate.

For the first tranche, the Reserve Bank of India announced a rate of Rs 2,684 per gram. Within a week, the gold price fell to Rs 2,588 per gram. Moreover, unlike, ETFs, you cannot buy these bonds every month and so cannot average out your purchase price.

The Budget might not have given you much to cheer about but it has proposed many big and small changes that will impact your portfolio. Use the end of the fi nancial year as a catalyst to get your finances sorted.

With inputs from Priyadarshini Maji