Union Budget 2021-22: Impact on Personal Finance

Yesterday was indeed a momentous day. India’s first digital budget was announced by the honorable Finance Minister, keeping in line with the times of global digitalization.

A lot of expectations surround this Budget, especially since the economy contracted for the first time in this fiscal year FY2020-21 due to the impact of COVID 19.

After 5 years of fiscal consolidation, we are now seeing the Government moving towards an expansionary budget with spending increased towards Capital expenditure. Outlay for Capital Expenditure has increased by 26% from ₹4.39 Lakh Cr in FY21 to ₹5.54 Lakh Cr for FY22 with more emphasize towards road & rail networks, textile parks, ports etc. The recent pandemic enforced the Government to spend more on healthcare, and expenditure on the health sector has increased to 1.8% of GDP from 1.5% and total outlay for health is ₹2.23 lakh Cr.

With regard to direct taxation, Government has maintained ‘status quo’ and there are no changes in this budget.

Following are few highlights from the Finance Minister’s speech regarding the impact on Personal Finance and our view on the same.

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Impact on Senior Citizens

Now in the 75th year of Independence of our country, when we continue our endeavor with renewed vigor, we shall reduce compliance burden on our senior citizens who are 75 years of age and above. For senior citizens who only have pension and interest income, I propose exemption from filing their income tax returns. The paying bank will deduct the Necessary tax on their income”.

Sinhasi View: As per this, there is no need to file ITR if the person is above 75 years of age which is a good move. However, this is only applicable if the person receives income only from pension and interest from fixed deposit/bonds & Banks will deduct the tax liability. However, in case of an income from capital gains & business/profession and dividends, the person has to file ITR.

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Impact on NRIs

When Non-Resident Indians return to India, they have issues with respect to their accrued incomes in their foreign retirement accounts. This is usually due to a mismatch in taxation periods. They also face difficulties in getting credit for Indian taxes in foreign jurisdictions. I propose to notify rules for removing their hardship of double taxation.

Sinhasi View: As per this, the GOVERNMENT WILL NOTIFY a set of rules at the earliest on this matter. As of now, there is no clarity on this from budget speech. We will need to wait for more details.

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Impact on Direct Taxation

• Pre-filling of ITR: Currently, Salary, TDS are pre-filled in the ITR forms. Further, Capital gains from listed securities, dividend income, will also be pre-filled.
• PF Contribution: If the employee’s EPF contribution is deducted but not deposited by employer, it will not be allowed as a deduction for the employer.
• Compliance: Provision is made for faceless proceedings before Income Tax Appellate Tribunal in a jurisdictionless manner. It intends to reduce the cost of compliance for tax payers, increase the transparency in the disposal of appeals. Along with this, Govt has announced the constitution of “Dispute resolution committee” and tax payers with up to income of ₹50 Lakh & disputed income of ₹10 lakh can approach this committee to resolve the disputes at initial stage u/s 245MA.
• Dividend income: TDS on dividend income from REiT & InviT is exempted.
• Advance tax on Dividend income: Govt has proposed that advance tax liability on dividend income shall arise only after the declaration / payment of dividend.
• Tax Audit: If the person does 95% of transaction digitally, tax audit will be applicable only if income / receipts exceeds above ₹10 Cr.

Sinhasi View: All the above measures are aimed to simplify compliance requirements. Pre-filling of Capital gains and dividend was announced in the earlier budget also and implementation from FY21-22 onwards is a good move.

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Impact on Unit Linked insurance schemes (ULIPs)

In order to rationalize taxation of ULIP, it is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to ₹2.5 lakh. However, the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of ₹2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021. Further, in order to provide parity, the non-exempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund.

Sinhasi View:

• This proposal is applicable for policies taken after 01-Feb-2021.
• This proposal is not applicable for policies taken prior to 1-Feb-2021
• As per this proposal, maturity proceeds of ULIP policy is exempted from Tax only if the annual premium is up to ₹2.50 Lakh.
• If the annual premium is more than ₹2.50 Lakhs, the maturity proceeds are taxable similar to the mutual funds i.e. the current LTCGT of 10% & STCGT of 15% on gains are applicable.
• The benefit of ULIPs as tax free investments has now been removed and it is in par with investing equity mutual funds.
• This is a good move so as to ensure standard taxation across all equity related investments.
• However, the amount received on death shall continue to remain tax exempt irrespective of the premium amount.

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Interest Income from PF

In order to rationalize tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of 2.5 lakh. This restriction shall be applicable only for the contribution made on or after 01.04.2021.

Sinhasi View:

• This proposal is applicable for the PF contribution made on or after 1-April-2021.
• The contribution made till 31st March-2021 & interest income from these contributions are tax free.
• As per this proposal, if the employee’s total contribution to PF (EPF, VPF) is more than ₹2.50 Lakh per annum, interest from contribution above ₹2.50 Lakh is taxable as per individuals income tax slab. For example I, If the person’s annual employee PF contribution is ₹3 Lakh, interest income up to the contribution of ₹2.50 Lakh is tax free & interest income on excess ₹50,000/- is taxable as per income tax slab.
• Therefore, ass per this proposal, if the employee’s total contribution to PF (EPF & VPF) is up to ₹2.50 Lakh per annum, interest from these contributions are tax free.
• We have to still wait for EPFO’s notification to understand the mechanism whether tax liability is to be paid every year or to be paid during the withdrawal.
• This move will dampen sentiments of persons with higher contribution to PF in order to avail higher interest rates and tax benefits.

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Impact on LIC IPO

Government has proposed to sell partial holdings of LIC through the IPO route.

Sinhasi View:

• This is a good move as LIC’s reporting standards and disclosures will improve, especially in the long run. And, more transparency will emerge in the functioning of LIC and its fund management.
• Despite the partial stake sale, the sovereign guarantee on LIC Policies will not be removed since Government will continue to be the majority stake holder.

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Impact on Capital Markets

As per the budget speech, Govt has proposed to consolidate the provisions of SEBI Act, 1992, Depositories Act-1996, Securities Contract (Regulation) Act, 1956, & Government Securities Act-2007 into a rationalized single securities code.

Along with this, Govt has also proposed to announce an “Investors Charter” as a right of all financial investors across all financial products.

Sinhasi View: Consolidation is always a good move. We will need to wait and see about this proposals especially regarding details of the Investor’s Charter’.

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Impact on Deposit Insurance Limit

As per the budget speech, Govt has proposed to move an amendments to the DICGC Act, 1961 in this budget session to increase deposit insurance cover from ₹1 Lakh to ₹5 Lakhs. The Government had approved the same last year itself.

Sinhasi View: This is a good move, since as per this proposal, if a bank is temporarily unable to fulfil its obligations, the depositors of such a bank can get easy and time-bound access to their deposits to the extent of the deposit insurance cover. This would help depositors of banks that are currently under stress such as PMC bank.

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Impact on Zero Coupon Bonds

Government has proposed to issue tax efficient “Zero Coupon Bonds” towards infrastructure funding.

Sinhasi View: This is a positive step as it will be another investment avenue in debt asset class. We have to wait and see the key parameters of these bonds, related risk issues & its suitability to individual / institutional investors.

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