What has the budget done to Personal Finance?

In this post we decode all the announcements connected to Personal Finance which were made in the recent Budget-2023 and the impact of those announcements.

Income Tax slabs

The income tax rebate in the new tax regime has been increased from Rs.5 lacs to Rs. 7 lacs. The new tax regime has been made as the default income tax filing mode though the option of choosing the old regime would continue. The basic exemption limit has been hiked to Rs.3 lacs from Rs.2.5 lacs in the new income tax regime. The number of income tax slabs in the new regime has been reduced to 5 from 6. The new tax slabs are

Rs.0 to 3 lacs – Nil, 3 to 6 lacs -5%, 6 to 9 lacs-10%, 9 to 12 lacs-15%, 12 to 15 lacs-20% and 15 lacs & above- 30%

For the salaried and pensioners with income of above Rs.15.5 lacs the standard deduction benefit now will be Rs. 52500 in the New Income Tax Regime.

So far there were only a few takers for the New Tax Regime which is now expected to see a good increase with the benefits announced for the New Regime in the budget. However those who have higher savings in products providing tax deductions in the Old Tax Regime, would still gain in the Old Regime if those deductions are more than Rs 4.25 lacs. That said the signals are clear that the Old Regime is marching towards its way out as it has been kept away from any favours.

There is also good news for the super rich in the budget as the highest surcharge levied which used to be 37%  has been reduced to 25% .

On the whole the budget has proposed measures that would leave more surplus in the hands of the public not only the middle class but also the super-rich, that would mean more savings to invest and consume which is healthy.

Leave Encashment

The limit of tax exemption on leave encashment on retirement of non-government salaried employees has been Rs.3 lacs, which has remain unchanged since 2002. This has been increased to Rs.25 lacs in line with the increase in government salaries. Though very late good that it has happened atleast now.

Savings Schemes

The maximum limit for Senior Citizens Savings Scheme(SCSS) for an individual account has been increased to Rs.30 lacs from Rs.15 lacs which is a huge boost for Senior Citizens to increase their exposure to this high interest paying Savings Scheme which currently pays 8%.

The maximum limit on Post Office Monthly Income Scheme(POMIS) has been increased to Rs.9 lacs for individual accounts from Rs.4.5 lacs and for joint accounts this has been increased to Rs.15 lacs from Rs.9 lacs. A shot in the arm for another Savings Scheme which is encouraging.

A new scheme for women or girls named Mahila Samman Savings Certificate has been launched for 2 years till March 2025. The scheme will have a maturity of 2 years and pay a fixed interest of 7.5% with provision to make partial withdrawal. No tax relief has been announced for this scheme yet without which the product is only in line with current Fixed Deposit rates making it unimpressive.

Life Insurance

Life Insurance sector has received a blow from the budget. The budget proposes to tax the maturity proceeds from traditional life insurance policies(non-ulips) with premium of more than 5 lacs in a year. This is applicable only for policies issued from 1^st April’2023. Util now the maturity proceeds were completely exempt regardless of the premium amount paid.

Conversion of Gold

Conversion of digital gold to physical gold and vice versa will not be treated as capital gains. This will increase the participation in electronic gold which eliminates storage risk and risk of theft. Just as everything is getting digital now,  gold also will see going more the digital way with this move.

Capital Gains deduction from sale of house

The maximum deduction that can be claimed on capital gains arising from sale of a house used to buy another property has been capped at Rs.10 Crores. Until now when a house property is sold and with the same sale value when another house was bought capital gains was exempted with no cap on the value. This would affect the super-rich.

Taxation of listed MLDs

Listed Market Linked Debentures(MLD) which had a favourable taxation where the Long Term Capital Gains above 1 year was taxed only at 10% earlier will henceforth be taxed like other debt instruments. This would mean that the Short Term Capital Gains generated within 3 years from listed MLDs will be taxed at the applicable marginal income tax slab(30% plus applicable surcharge for those in the high tax slabs) and the Long Term Capital Gains(above 3 years) will be taxed at 20% . This makes listed MLDs on par with the unlisted MLDs on taxation. MLDs which is an exotic product availed by HNIs with this loses its flavour by leaving lesser post tax gains.

TDS on interest of Listed Debentures

The budget has removed the exemption of TDS(Tax Deducted at Source) on interest paid by listed debentures. This has been introduced to prevent under reporting of interest from listed debentures. This is a product with small investors participation as well and would impact investors negatively.

TCS on foreign remittances

Tax Collected at Source(TCS) for foreign remittances done for overseas tour packages or to invest in stocks abroad has been increased from 5% to 20%, making investing in foreign equities a costly affair. In the recent times more avenues have opened up to invest in foreign stocks and even retail investors were utilising these to take international equity exposure which has got a blow from the budget. However, individuals may be able to claim credit or refund of the TCS.

Online portal to reclaim shares and dividends

An online portal is proposed to be created to reclaim shares and dividends from Investor Protection & Education Fund(IPEF) which will substantially reduce the processing time as it is currently a manual process that consumes longer time.

Online storage of KYC documents

The budget has proposed that the government will permit fintech firms to use its Digilocker facility to store and share KYC documents online securely with various banks and regulators. This would simplify KYC process and reduce the process time.

The overall impact of the budget on Personal Finance

While the budget at the face of it looks to leave more surplus with the middle class specifically by the increase in rebate to Rs.7 lacs in the New Tax Regime from the earlier Rs.5 lacs , it doing this only with the New Regime which accommodates no deductions, in a way discourages investment habits for the long term. Deductions are encouraged by the Old regime for long term investments like PPF,NPS,EPF, 5 Year Deposits, SCSS, Life Insurance , Purchase of house, Health Insurance, etc through Sec 80C,Sec 80D,Sec 80CCD and Sec 24 . Taxing maturity proceeds of traditional life insurance policies if annual premium is above 5 lacs is also a dampener for investment habit as smaller towns still do not have adequate access to evolved new age investment products and resort mostly to such traditional insurance policies. The much-anticipated waiver of Long Term Capital Gains Tax for equities was given a miss by the budget which if considered could have encouraged equity investing which is still languishing in the single digits in penetration. The increase of TCS for investing in foreign stocks also puts a hurdle in the way of a habit which was just taking baby steps.

However, the increase of exemption limit for Leave encashment, increasing of deposit limit for Senior Citizens Savings Scheme, hiking limit for Post Office Monthly Income Scheme, waiver of capital gains for conversion of physical gold to digital gold and vice-versa, introducing of online portal for claim of shares and dividends from IPEF and digitisation of storage of KYC documents are welcome moves.