Impact of Budget 2019 on financial lives of people

 

Proposals in every Union Budget typically impact the financial lives of the people till the next Budget. At the same time, often there are few provisions that can have a longer term impact. Take the case of Section 80C limit of Rs 1.5 lakh introduced in 2005 and that exists till date. Down the years, it has shaped the investment behaviour, especially for tax saving investments. Budget 2019 also has some such provisions with long term implications for financial goals and financial behaviour. Here are four major ones.

A new tax saving investment for financial planning

In her Budget speech, the Finance Minister Nirmala Sitharaman announced the introduction of a new tax saving investment in the nature of exchange traded funds (ETFs).These ETFs will invest in shares of Central Public Sector Enterprises (CPSE) that are part of government’s disinvestment programme.

This is pretty much in line with the government’s disinvestment programme in the recent past where individual investors were invited to invest in CPSE ETFs. The sweetener in Budget 2019 is this that these investments will eligible for tax savings much like equity linked savings schemes (ELSS). For the uninitiated, for the government disinvestment programme, an index of CPSEs is created whose shares are to be disinvested. CPSE ETFs invest in the shares of these CPSEs in the same proportion as the CPSE index.

This new investment option will add to the tax savings investment menu helping people plan for their financial goals such as children’s higher education and retirement. However, this higher risk, higher reward, investment can be considered only after people have made ample tax saving investments in existing investments be it traditionally popular investments like Public Provident Fund (PPF) and National Savings Certificate (NSC) or popular equity-linked investments such as ELSS and unit linked insurance plans (ULIPs). Restricted investments in select CPSE shares will make CPSE ETFs a much higher risk, tax saving investment.

NPS maturity lump sum gets tax-free

Budget 2019 has also brought to the fore once again the importance of focusing on taxation of investments during stages of contribution, returns and maturity. The Budget has formally implemented a recent announcement of National Pension System (NPS) maturity lump sum being made tax-free. Remember, this is 60% of accumulated savings on maturity of NPS at age 60. This will help people meet lump sum requirements on retirement such as relocation. This, along with the fact that you can invest an additional Rs 50,000 to avail tax savings under Section 80CCD, over above the annual limit of Rs 1.5 lakh, will make NPS and retirement savings through tax saving investments more attractive. However, NPS continues to suffer from the taxation of regular retirement income that needs to mandatorily come from annuities by deploying 40% of NPS savings on maturity.

TDS on non-exempt life insurance plans

Talking of taxation of maturity proceeds, Budget 2019 has also brought about a change in the taxation of maturity amount of non-exempt life insurance plans. They are life insurance plans that provide life insurance coverage of less than 10 times their annual premium and are ineligible for tax deduction under Section 80C. According to the Budget, the difference of the maturity amount and premium paid will be subjected to Tax Deducted at Source (TDS) of 5% .As before, you will need to check out the taxation aspects before opting for life insurance plans of short-duration, short premium paying periods and single premium plans before you invest lump sum amounts for future financial goals.

Coming soon: Rent reform legislation

For about 20 years, tax deductions for home loan principal and interest repayment have spurred buyers to own homes. Many people have subsequently bought second homes, and some have even bought more. However, real estate investors and multiple home buyers often view their assets from the standpoint of long term capital gains benefits. Rental income from property, an important source of property income worldwide, has never quite got the prominence it deserves thanks to inadequate legislation to protect the interest of property owners.

Budget 2019 has resolved to review and fix the legislative lacunae regarding rental properties. This will ensure people buy and hold on to their properties for the long term, ensure proper upkeep of their properties with the help of adequate rental income and protection of ownership rights. The latest move would help many people, especially those seeking regular income, like the retired, to have a regular income generating option in their portfolio of financial investments.

As with previous Union Budgets, in case of Budget 2019 too, there are some provisions that will shape the road to your financial future long after you have forgotten about Budget 2019.

By Udayan Ray
Founder: FundooMoney

ARN: ED/07/19/14427