How does Budget 2020 impact the personal finances of aspiring Indians?

Finance Minister Nirmala Sitharaman spoke on multiple themes in this budget with a major theme being aspirational India.

Whilst multiple initiatives were announced with respect to this theme, most aspirations around a budget revolve around trying to understand how personal finances will be enhanced or impacted by this budget. After the budget announcements reactions will be mixed, more so because there is a new tax regime announced with lower tax rates on one side, but doing away with the exemptions and deductions available on the other side. So what can the aspirational Indian now look at?

– Each individual will need to look at his income level and accordingly look at which regime may be more efficient — the earlier regime with exemptions, or the new tax regime with a lower tax rate, but exemptions/deductions taken away. He would need to keep in mind that over a period of time, all exemptions /deductions may gradually be removed and the choice to move from one option to another may not be allowed each year, so the choice may need to be

evaluated carefully. The aspiring Indian will also need to keep in mind that money once spent due to the tax-saving, will not be available to support long term goals like retirement, and there could be a regret at some point in the future on it.

– In case one opts for the new tax structure, rather than spending on discretionary items, it may be a good idea to upskill oneself as there have been a host of announcements on degree level online programs.

– Besides that, investors could also look at the new debt ETFs announced which will invest in government securities offering both a new investing avenue and a new way to invest in fixed income via ETFs. However, the tenor of investing will be important to keep in mind as long term investing is ideally suited to equity investing and not to debt investing, and thus investors

will need to evaluate the long term returns on debt vis a vis equity before making this choice.

– The enhanced deposit insurance guarantee from Rs 1 lakh to Rs 5 lakhs should provide some reassurance to the bank fixed deposit investor who may have been a bit shaken from the experience of some others, when some banks in 2019 gave sleepless nights to investors as their money was not accessible to them. For investors who went through a similar situation with debt mutual funds, wherein segregated portfolios were created, there is now clarity on the tax treatment on sale of a segregated portfolio, with the original date of purchase being considered just like for the original investment.

– The divestments of PSUs and the announcement of the LIC IPO may also open avenues for investors to invest and participate in some new offerings in equities.

– Individuals who are part of a start-up may find some solace that tax on the ESOPs they may have received has been deferred by 5 years or when they sell their shares or when they leave the company, whichever is earlier (start-up as in Sec 80-IAC).

– If you are using mutual funds as an investment vehicle, there is a tax deduction at source on income received in excess of Rs 5,000.

– With the change in dividend distribution tax rules, dividends will now be taxed in the hands of the recipient depending on his tax slab. Thus, investors who depend on dividend income from mutual funds may need to evaluate if they should consider the use of systematic withdrawal plans more carefully, using a growth option.

– The fiscal deficit numbers at 3.5% for FY 2021 and the government borrowing program should enable bond markets to settle down fairly quickly, though equity markets may continue to be concerned about the lack of stimulus measures to boost growth. However, we need to remember that the biggest boost to equity markets took place through the corporate tax rate

cut, and therefore whilst the benefits of that may take time to accrue, the Budget need not address all factors, as reforms and stimulus measures can also take place outside the Budget.

Thus, aspiring Indians need to focus on their own family budget rather than the Indian government’s budget.

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