The poll-bound Narendra Modi government is set to announce its interim budget on February 1. Expectations are running high as this is the Modi government's last budget before the general elections. While finance minister, will only be presenting a vote-on-account on February 1, the middle-class taxpayers are expecting the government will ease the tax burden by offering more deductions and exemptions.
CNBC-TV18 caught up with Kuldeep Kumar, partner, PwC; Homi Mistry, partner, Deloitte and Feroze Azeez, deputy CEO, Anand Rathi PVT Wealth, to understand the personal finance wish list for budget 2019 and what are the areas where investors can perhaps hope for some cheer.
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Edited Excerpts:
The war cry this time around is an increase in the threshold itself. Everybody is saying that from Rs 250,000 it could go to Rs 500,000, some people are saying Rs 300,000-350,000. So what is your first thought with respect to this year’s vote-on-account?
Mistry: I feel that there is a good chance or possibility that the exemption limit for all taxpayers would go up. For example, currently, up to Rs 250,000 you do not pay any tax for a person who is under 60 years. So there is an expectation that the amount may go up from Rs 250,000 to Rs 300,000.
Correspondingly the exemption limit for a person who is 60 and above is Rs 300,000. So there is an expectation that it should also go up by another Rs 50,000 to Rs 350,000. And for those who are 80 and above, there is a possibility that the exemption limit for them may increase from Rs 500,000 to Rs 550,000.
Are you expecting similar changes in the basic exemption limit?
Kumar: If you look at the trend the way this government has been walking the tax path, each year it has increased the tax. Last year, the government has introduced 10 percent surcharge for those who were earning between Rs 50 lakh and Rs 1 crore. It has also capped loan claim limits of house property to Rs 200,000.
This year, the common man where taxpayer at large may benefit from the budget and that can happen by raising the basic exemption limit and also raising the 80c deduction limit from Rs 150,000 to Rs 200,000. The 80c deduction need not comprise a lot of investment or even expenditure. It automatically gets consumed without additional effort or push from the taxpayer to save more.
Last year the budget benefitted the senior citizen then this time why not the women taxpayers and for them, the basic exemption limit can be raised to Rs 325,000 from Rs 250,000. There will be a little bit of inconvenience but that could be a good opportunity to cheer them as well.
Beyond just the first income tax slab what else are you watching out for this year?
Azeez: If you look at tax from a budget standpoint, there are two heads; one is on the income and the other is on investments. I think investments get lesser attention than income but the impact on your investment taxation will have a larger implication in the long run.
So if there is some increase in the limit like we were speaking, I do not think it is going to be small, it is going to be a large limit change which is going to be meaningful to make the headlines.
From investments standpoint, I think they have just taxed equity and that is not going to change but on the debt side, as inflation has come down, at least the indexation number has come down to almost like 3 and 2.5.
What has happened is the indexation limit which you had, the indexation provision has come down from 9 to as little as 2.5-2.9 just because inflation has fallen so much. So that they had eliminated one provision which went unnoticed is that 10 percent without indexation or 20 percent with indexation. The 10 percent without indexation was removed from all debt mutual funds. I think that should be reintroduced – that is a wish list. I do not think it will be the attention.
The larger picture is the government revenues are going up in the long run only if they bring inheritance tax which is what our global peers have. In the US it is in the range of 40-50 percent and in the UK, it is as high as 40-45 percent. Are we going in that direction? We are. So that is one thing that I will watch out for maybe not now but that is one more fear which you need to provision for and plan for.
This unbundling of 80c kitty is something that I think women and men like you have been arguing for a long time. It is Rs 150,000 right now, everything clubbed in including your LIC premiums, your pensions, ELSS etc. If the finance minister were to look at industry suggestions, how can this be perhaps streamlined better?
Mistry: Right now, there is a lump sum of Rs 150,000 and there have been discussions whether there should be a further increase. Actually, the finance minister had made this limit of Rs 150,000 in the year 2014 when he first presented his budget. So at least five years have passed. Therefore, my feeling is that if he were to increase the limit, he may not necessarily unbundle it. It may still continue as being bundled and there is an expectation that it will go up to Rs 200,000 or if you are lucky enough then it may go up to Rs 250,000.
Your thoughts in terms of hiking deductions, more exemptions. Which are the sections that you would look at where primarily there is a strong case?
Kumar: Since this is a vote-on-account, I do not think they will try to make too many changes in this budget. I think he will only make changes which are easier and simpler to pass on to the taxpayer and perhaps raising the 80c deduction limit is one of the ways to achieve that.
The other point I would like to make that the government has set up a task force committee earlier this year to do the reforming of the Income Tax Act. I think all those structural changes probably will come in the future. At this moment only those things will happen which will go to common man which will look big and the government already indicated that they are in the slog over so why not to bat well.
Last year was an important one, people had to learn to deal with long term capital gains tax (LTCG). What has been the first year experience? Have clients got used to it, are people utilising that one lakh exemption limit that was given?
Azeez: Fortunately or unfortunately it is clubbed with the year which didn't make money. The market did not do much, so any gains. The second thing which the FM did was giving a grandfathering provision. So, people have not utilised that limit, like January 31 values have been locked in from your taxation standpoint, have those limits been breached?
Almost 80 percent of the mutual funds are below that limit. 80 percent of the open-ended schemes are below the January 31 limit. So, you have not finished your grandfathering, so taxation has not hit us this year. However, we have to learn to remember that and use that one lakh limit as and when it is there.
The second thing which you have to irrespective of budget or no budget is that you should not change your portfolio till you reach that limit, otherwise you are increasing your tax liability.
Dividend distribution tax has been here now from April 1 even on equity mutual funds. However, I think still there is lakhs of crores in dividend options, that has still not moved top growth options. I do not think the industry is propagating that change. So, as an investor, you are duty-bound to move from dividend reinvestment to growth.
When you shift your mutual fund holdings from the dividend option to the growth option, is there going to be a one-time tax hit?
Azeez: No, not currently because there is not too much gain, so you are grandfathered. Otherwise, dividends which are coming, especially balanced funds are on dividend reinvestment option or dividend pay-out option. In a growth option you are at least deferring tax and when you defer tax, you get compounding in your favour and that is the only certainty in the business of investing and you are letting go that compounding benefit of the tax component by paying it at the source, rather than paying it at the exit. For long term investors, it is an important point to acclimatise yourself and take those as decision inputs when you are taking actions.
Now we have had a year to acclimatise, are there any tweaks at all or any further clarification you would need?
Mistry: People may not have really paid much tax because of this grandfathering provision and a lot of the share prices were at their peak on January 31, 2018. So, even if there is a gain, it is not much. You may or may not use the benefit of Rs 1 lakh and even if there is a tax it may not be very significant because the tax rate is only 10 percent.
I want to understand the provisions of the section 54EC. It gives the option of exemption from long term capital gains as long as you reinvest the proceeds in certain specified securities and then you can claim an exemption. Help us understand this, I thought this really did not apply to shares, this only applied to physical real estate and that too with a Rs 50 lakh cap, you could reinvest gains upto Rs 50 lakhs. I think the securities were bonds issued by entities like NHAI, REC. So, is this how the provision is being interpreted, are you expecting any changes?
Mistry: There is a section called 54EC. In the past if you had any long term gains and you invested in these specified bonds of NHAI or REC, you could claim a tax exemption upto Rs 50 lakh, it could be for any kind of long term specified assets that you had sold and you earned a long term gain.
Last year, the government has restricted the benefit and now if you sell land or building which is long term in nature, then only you can get the benefit of the exemption if you invest again upto Rs 50 lakhs in these NHAI or REC bonds. The other catch is, you got to keep these bonds not for a period of three years which was initially there, you got to now have it invested in these bonds upto 5 years.
So, these were the changes made last year and this is 54EC. So, what is 54EE then in that case?
Mistry: 54EE is another section which was introduced a few years back. There also if you had long term capital gains on any asset and you invested the money in certain notified units of specified funds by the government before April 2019 and capital gain exemption upto Rs 50 lakh was available. So, far no such units of any specified fund have been notified by the government. So, one cannot really make the use of this provision currently.
So, this kind of ties in pretty well with some inputs that I have been picking up from the mutual fund sector because they want equity mutual funds to get the benefit as well. If someone is willing to lock-in the proceeds or the gains for at least a period of 5 years, means he is a long term investor, then allow them to offset capital gains from a previous investment. I do not know if this makes sense but any further thoughts you would like to add on capital gains?
Azeez: It makes perfect sense. If real reinvestment with certain clauses can give you capital gains exemption and the other growth asset is equity, why shouldn't equity also get that benefit?
Earlier there was no long term capital gain on equity. Now that you have introduced long term capital gains, you have to also provision for what exemption provisions which you will allow a person after making the money. I think that will only happen after we progress in this journey of long term capital gains for long enough.
It has been there in real estate forever. So, the point I am making is it is very wise to have both the growth assets - real estate and equity and second is all our retirement savings are largely being pushed towards debt which strategically is not right for an investor.
If you see 80C you have 7-8 debt options and you have one equity option which is ELSS. So, that is why I am very excited about NPS being included in 80C.
Even today, if I am using several other instruments under my 80C, I would stop them except the involuntary ones like an EPF and use that for my provision of NPS because it allows me to invest in equity funds with minimal costs. So, what you are saying makes sense but it is a little way ahead. Point two, you have to be conscious under your 80C, what portion of your money is going into debt and how much is going into equity. 80-90 percent should go into equity and 10 percent should go into debt.
Any further changes in NPS? What we just saw a couple of weeks back actually was that the time when you are withdrawing money from NPS, there things have been made more tax efficient already ahead of the budget. So, if you could just revisit those provisions for us?
Kumar: Government made the announcement, I think those were very good steps. In the case of government employees, the government contribution is going to be 14 percent as against 10 percent for employees in the private sector.
Then the government employees have also been given the choice to invest into equity oriented proportion as well. Another interesting point was that, if the government employees are investing into the tier-II account and with a lock-in period of three years, they will be able to avail the deduction under section 80C. Now, this announcement is not talking about the private employees, although these were the announcements but to give them the effect probably in this budget we will see the changes. So, it is expected that the contribution to tier-II account for private employees may also be made tax exempt.
Coming to the withdrawal question, earlier what used to happen was, at the time of retirement when you are withdrawing money from the corpus from NPS, you have to compulsorily buy the annuity of 40 percent and the rest 60 percent you can take as a lump sum.
Out of that 60 percent, 40 percent was exempted and on 20 percent you used to pay tax. Now the government announced that, that limit of exemption has been raised from 40 percent to 60 percent. So, now the NPS would be in the exempted category.
So, I think that NPS is a particular focus because India does not have a social security system in place and the government is pushing very hard to make NPS popular and it has also now been made available to the private, even to the self-employed individual also. I think the government probably will continue that journey and the focus on this will continue so that lot of individuals join the NPS.
We have to now talk about an important asset class and that is real estate because quite a few changes have happened over the course of the year. I think one of the most painful changes was when the loss from house property was capped at Rs 2 lakh. So, whatever loss you are making, interest costs etc, you couldn't get more deduction than Rs 2 lakhs. So, the argument the government was throwing out was, they do not want unnecessary speculation, they don't want to reward people for just going and buying houses and letting them use the entire loss as the deduction. Your thoughts on this? There is a huge push from the real estate lobby to tweak this, to dilute this further, how do you evaluate this?
Mistry: This provision was brought in about two years back. Let us say your loss is Rs 5 lakh from house property and you have got other heads of income where you are earning income, you can only set if off to the extent of Rs 2 lakh and the balance amount, let us say Rs 3 lakh can be carried forward to the subsequent years but it can only bet set-off in the subsequent 8 years only against house property income and not against any other income.
So, that would not make sense for the same house anyway because you would be getting a loss from the same property even in the subsequent years?
Mistry: That is correct.
The loss simply being the fact that there is deemed notional rental income versus the interest expenditure that you have and therefore in typical cases you would arrive at a loss?
Mistry: Correct. The real estate is lobbying to either remove it or increase it. I think one will have to really wait and watch to the interim budget, may be changes may not take place right now because it is an interim budget and this provision was just brought in a couple of years back.
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