As is customary for this time of the year, the Union Budget takes center stage. The Modi government will seek a third term next year in the Lok Sabha elections in 2024 (nine States will be going to polls this year). Presently, enough information is floating in the market on Google, Twitter, memes, etc. I intend to look at the implications we can draw for our financial planning.

The Union Budget of India 2023, presented amidst the commodity price spikes and aggressively developed market rate hikes, gives the term ‘Saptrishi’ depicting its seven priorities –  Inclusive development; Reaching the last mile; Infra & investment; Unleashing the potential; Green growth; Youth power, and Financial sector.

Before discussing the implications, let’s understand what a government budget is. It is a financial plan for a fiscal year that outlines the government’s expected revenue and expenditures. It is a tool used by the government to allocate resources and prioritize spending, including investments in infrastructure, public services, and social programs. The budget also provides a picture of the government’s financial position and the impact of its spending and revenue policies on the economy.

The budget announcements impact different components of financial planning – from tax planning to insurance planning, retirement planning, and investment planning.

Let’s start with the most talked about in any Budget – taxation changes.

From the tax planning perspective, there is a clear indication that the government wants the taxpayers to shift to the new regime. They have made it a default setting (intending to take benefit of the inertia in financial decision-making). Moreover, there are several changes announced in the new regime – reduction of tax slabs from 6 to 5; introduction of standard deduction of Rs 50,000 and family pension; increase in the rebate upto 7 lakhs (note that it’s not the same as basic exemption limit); limit for presumptive taxes for businessman and professionals; Surcharge for income above ₹5Cr reduced from 37% to 25%; reduction in the maximum rate (for those with income more than ₹5 crores) from about 42.7% to about 39%.

The default new tax regime and revised tax slabs will result in higher disposable income, helping in better savings and additional spending. Since the deductions are not available under the new tax regime, there is a possibility that the savings rate will be reduced (ignoring life and health insurance).   

Furthermore, the treatment of capital gains has been modified. Firstly, converting physical Gold to e-gold is not considered capital gains, incentivizing the gold monetization scheme. The second relates to the capital gains arising from stocks, gold, real estate, or even startups that could be invested in a residential place (to promote the housing sector). The budget proposes to cap these deductions under sections 54 and 54F to Rs 10 crore, effective from the assessment year 2024-25.

Additionally, for women investors, Mahila Samman Savings Schemes investments can be made with no TDS till ₹2 Lakh with 7.5% for two years.

Considering the insurance planning, one of the critical budget proposals is to tax the proceeds from life insurance premiums over the annual premium of ₹5 lakhs from the new financial year, i.e., from April 1, 2023 (Not applicable to ULIP and the Death benefit). It’s not surprising to see insurance stocks going south by more than 10%. Notably, the exemption under section 10 (10D) has been removed.

In retirement planning, the limit for Senior Savings Schemes has been hiked to ₹30 Lakhs now from the old ₹15 Lakh. The scheme earns 8% currently (when inflation is @5.7%). That means a senior couple can park Rs. 60 lakhs and earn a pre-tax interest of Rs. 4.8 lakh (if that’s all they make, it’s entirely non-taxable). That’s Rs. 40,000 per month, which is pretty decent for a person to live on, and there are hardly any other “safe” avenues at this interest rate. If you’re planning for your parents or retiring soon, this might be a way to park money (for five years) to get a decent return.

Considering investment planning, we may look out for the sectors– technology (Going digital), Energy (Go Green), Infrastraticure, and Tourism, thrust areas of the budget.

On a side note, the word green was mentioned over 20 times, at least during the 1.5-hour speech. Thirty-five thousand crore funds are allocated for priority capital investment for net zero.

The best part of the budget speech was the recognition of changing socio-economic paradigm in adopting technology and digitalizing routine life. Increased attention to initiatives like simplified KYC, Digi locker for businesses, integrated IT portal, and National Data Governance Policy will help startups focus on building great products. Such an expansion of the digital infrastructure could benefit technology companies.

The tourism sector has received a healthy boost in the budget, with “Dekho Apna Desh” getting a well-deserved spotlight. Under this, 50 tourist destinations will be selected on a mission mode to be developed as a package for domestic and international tourism. Increased infrastructure and rural development allocation could benefit companies operating in these sectors. Moreover, with the higher disposable income due to changes in the taxation rules, the auto sector and consumer durables space would benefit. However, the actual impact on stock market investments will depend on various factors, including the global economic scenario, geopolitical developments, and company-specific factors.

From July 1 this year, one would have to spend 20% more for money spent abroad, including traveling and spending abroad, buying US stocks, or any form of remittance (Liberalised Remittance Scheme – LRS). Also, from April 1, 2023, any income received from a REIT or InvIT is fully taxable in the hands of unit holders.

Market-linked debentures (MLDs), structured products that invest in fixed-income and derivative instruments with a minimum investment amount of ₹10 lakhs, gained traction in the last many years as they were offering tax arbitrage. Till now, Listed MLDs were taxed 10% after a one-year holding period, similar to equity. In the Budget 2023, the finance minister proposed that these securities’ sale, redemption, or maturity will be treated as short-term capital gains and taxed at the applicable individual slab rates (with no indexation). As this has an immediate impact, one should sell market-linked debenture quickly to avail of the tax benefit. 

Limit on Post office Monthly Income Scheme is increased from ₹4.5 lac to ₹9 lac for individuals and 15 lac for joint holdings

Do remember the Budget proposals may change or differ when the budget is passed by the Parliament and notified by the government. Consider a long-term investment approach and do not make decisions based solely on budget announcements. Don’t forget to calculate and check which regime is suitable – New or Old?

Best Regards
 

Dr. Tarunika Jain Agarwal Ph.D. 

Alpha Research