This budget came as a pleasant surprise for the middle income taxpayer. The Finance Minister has increased the income tax slabs. He has changed the tax slabs for men, women and senior citizens. The consumer, already burdened by spiraling prices, will welcome these changes in the tax structure with open arms. However, with the introduction of sweeping changes in the taxation methodology on April 1, 2011 via the Direct Tax Code, this happiness could be a limited one.
Changes in tax slabs
The highest tax slab has been increased from Rs 5 lakhs to Rs 8 lakhs, providing a tax relief of Rs 20,000 to Rs 50,000 for the taxpayers.
Additional deduction under Section 80C
The Finance Minister has also increased the limit of deduction available under Section 80C. He has allowed an additional investment of Rs 20,000 in infrastructure bonds taking the total limit under Section 80C from the current Rs 1 lakh to Rs 1.2 lakhs.
Besides investments in Employee Provident Fund and principal of home loan, there are a large number of instruments like post office saving schemes and equitylinked savings schemes where you can invest to claim deductions. By this provision, the government has enabled investors to invest in debt instruments issued by entities controlled by the government.
This will help increase the national savings rate. The Economic Survey issued last week had observed that the gross domestic savings stood at 32.5 percent of the GDP in 2008-09, while the gross domestic capital formation (investments) was 34.9 percent. The rates of domestic savings and investments are now on par with the world's fastest growing economies.
Through this provision the Finance Minister has put more money in the hands of the middle income segment, raised domestic money for the very important infrastructure sector, and reduced the dependence on external funding for infrastructure.
Towards simplification of taxes
The Finance Minister has emphasised on the long-term road map of simplification of direct tax laws. This year's budget introduces a two-page Saral-2 returns form for individual salaried assessees, working towards a simpler tax process. Further, the budget emphasised again on the need to implement the Direct Tax Code on April 1 next year. So, next year onwards all incomes whether it is salary, longterm capital gains or short term gains will be taxed at a uniform tax rate.
Further, under the EET (exempt, exempt, tax philosophy), investors have to get used to paying tax on all types of gains from investments whether received every year regularly or at the time of redemption. Meanwhile, for this year alone, investor tax-payers can enjoy the double benefits of lower taxation and exemptions on gains from investments.
Investment strategy
The stock markets that were very worried before the budget welcomed the provisions by trending upwards. Individual investors can now renew focus of their investment strategy towards equities. With the promise of fiscal discipline and an indirect stimulus of tax savings the growth trajectory is now on a firm path.
Barring any international hiccups the stock markets will continue their forward march. Hence, picking up good stocks and increasing allocation to equity will work in giving good returns in 2010.
