Post budget tax guide

MONEY TODAY tracks the changes in the tax structure and interprets their impact on your finances.

Print Edition: March 22, 2007

Inscrutable are the ways of providence—and of the finance minister. His shrewd manoeuvring in Budget 2007 has bewildered taxpayers. The measly increment in the tax-free exemption is overshadowed by the hike in education cess on every single tax you pay.

Added to that is the hulking menace of inflation that is eroding the value of your earnings and investments. Deserted by P. Chidambaram, the aam admi and his rich counterpart are looking toward the heavens for reprieve.

MONEY TODAY tracks the changes in the tax structure and interprets their impact on your finances. We spoke to investment and tax experts, including tax and investment adviser Surya Bhatia, financial planner Gaurav Mashruwala and income tax expert Ved Jain to figure out how to survive and thrive in the post-budget tax regime.

Their collective wisdom is distilled in the pages that follow. No jargon, no kind words. These are hard numbers, made simple for you.


Post-Budget tips for you

• Beat the hike in dividend distribution tax on liquid funds by opting for growth option.Withdrawals after a year are long-term capital gains and get indexation benefit.
• Consider investing in floating rate plans and fixed maturity plans.
• Go for tax-free bonds floated by state finance corporations for funding urban infrastructure. But do check the credit rating of these bonds.

Till now, service providers earning over Rs 4 lakh a year had to pay service tax. The Budget has raised the limit to Rs 8 lakh now. Less hassles and tax for micro businesses and consultants

Being not-so-rich has only a few rewards. Budget 2007 was one. The FM’s “give and take” trick favours only those earning less than Rs 5 lakh a year. For them, what has been “given” in higher exemption limit (Rs 1.1 lakh) is more than what has been “taken” by the higher education cess (from 2% to 3%), as the table (iii) shows. That’s the impact of the cess only on income tax. Maximising Sec 80C investments becomes even more crucial to save taxes—as table (ii) proves. Of course, that may not be easy with a Rs 4 lakh a year income.

For female taxpayers the impact of the hike in education cess starts eating into the benefit of higher threshold once they reach the annual income of Rs 5.4 lakh, unlike their male counterparts who reach this point of “net loss” at the income level of Rs 5 lakh. Irrespective of the gender, at higher income levels the scope of tax-free investment gets limited. If you invest in debt funds, consider switching from the dividend to growth option to escape the dividend distribution tax. Consider gifting some money to parents if they are in lower tax slabs.

Post-Budget tips for you
• Nest egg not big enough for comfortable retirement? Unlock the value of your property by going in for reverse mortgage.
• No use going in for the 9% senior citizen deposit scheme. Now you get up to 10% on bank FDs.
• Get a larger medical cover at lower cost.The Rs 5,000 hike in deduction of medical insurance premium under Section 80D means more cover, less tax.
Investments that save tax under Section 80C
• Employees’ Provident Fund
• Public Provident Fund
• NSCs
• Life insurance policies
• Pension plans
• Bank FDs (over five years)
• Tax plans of mutual funds
Expenses that reduce tax
• Home loan principal repayment
• Tuition fees of child or dependent
• Medical insurance premium (up to Rs 15,000 a year)

Senior citizen taxpayers are the biggest beneficiaries of Budget 2007. Not only do they get a fatter tax cut, but the exemption limit for medical insurance premium has also been raised by Rs 5,000. Premiums are very high at this age and the tax exemption will come in handy.

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