Monday, February 5, 2018

It is important to spend more time on one’s household budget than the Union Budget.

A lot of people routinely ask the common question, “budget kaisa hai?”
So, let us see if someone has to watch the budget, what are the important things one may look for that may impact one’s personal finances.

Pay attention to your household budget ... it is more important than the union budget

The English translation of the article is as under:

It is that time of the year when the Finance Minister presents the Union Budget in the Indian Parliament. A few days before and after are then spent by lots of people trying to analyse the budget proposals.
At the end of all the analysis, one may be left with a feeling that “The budget has nothing for those who can analyse it, since it tried to give lots to those who cannot.” Very often, the most common comment is that the budget was a non-event. The game has been going on for years and still presentation of the Union Budget remains one of the most awaited annual ritual. Union budget is a great business for the financial media. The common man also gets infected and starts to bother about the proposals of the budget.
Some of the financial planning experts have a sarcastic view of this situation that people spend more time discussing the Union Budget than they spend on their household budget.
Yet, a lot of people routinely ask the common question, “budget kaisa hai?”
So, let us see if someone has to watch the budget, what are the important things one may look for that may impact one’s personal finances.
Let us start with understanding what the budget is.
The Union Budget of India, referred to as the Annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February (for last two years, the date is changed to 1dst February) by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill, has to be passed by the House before it can come into effect on April 1, the start of India's financial year.
This is essentially an account of how the money of the public was spent last year and how the Government proposes to spend the same in the coming year. The whole exercise is an opportunity for the Government to announce various means to raise resources to fund the expenses. It is here that the Government may modify certain tax heads either with the objective of increasing the Government receipts or with an objective to promote certain behaviours like spending. The changes in taxation may also be done with an objective to promote or support certain sections of the industry.
It is these changes in the tax structure that the people are interested in. what kind of taxes would be introduced, whether there would be any increase / decrease, which industries may be impacted, which companies may be impacted.
The financial planning experts discourage small investors doing such intense analysis of the Union Budget. Such detailed analysis may be carried out by expert investors, but those who may not possess the expertise may be better off with a diversified portfolio. In a diversified portfolio such changes by the Government may have positive impact on some part while some other part may be negatively impacted.
Then, is the budget of any relevance for personal finances? Yes and no. The union budget will not change one’s lifestyle or one’s responsibilities towards the family. One’s dream also would not be impacted by the budget proposals. At the same time, any changes in the personal income tax rates or slabs would have a bearing on the take home salary, thus impacting the cash flow for the family. Apart from that, the Income Tax Act already incentivizes people to take care of their personal finance needs.
·       To cover basic household expenses, the Income Tax Act has a provision for standard deduction
·       We need life and health insurance. There are provisions in the Act that help us save tax when we pay premium for these insurance policies.
·       We need to build a corpus for retirement. Investment in retirement plans; PPF, NPS, etc. have tax saving features.
·       Buying a home is almost every family’s dream. The EMIs paid on loan can bring down your tax liability. Both the components of the EMIs, viz. principal repayment as well as the interest paid offer tax deduction under different sections of the Act.
·       Every family wants to get the children educated. There is a tax deduction on the amount of fees paid for the education.
You look at various needs and there are provisions in the Act.
Given that, one has to forget about the Union Budget while planning one’s finances. It is only at the product buying stage that one may need to check the budget provisions. Consider the following questions after one’s plan is ready:
1.     Is there a more tax-efficient product?
2. Does the budget provide for launch of some new scheme, e.g.,
·       One of the earlier year’s budget made announcement for launching inflation-indexed bonds or
·       In another year tax-saving infrastructure bonds were introduced, which were later replaced by infrastructure bonds giving tax-free interest income
·       Few years ago, Rajiv Gandhi Equity Saving Scheme was introduced, which was modified later, and then discontinued
3. Are there any changes in the tax laws that may have an impact on one’s income for the current year or any of the future years?
·       Long term capital gains tax has been reintroduced. Should one be concerned? Yes, the returns from equity would be lower to the extent of the tax from now onwards. At the same time, should one reduce the allocation to equity due to this? Well, allocation to an asset class should be considered based on the investor’s need and the product’s characteristics and not on the basis of taxation.
·       Similarly, dividend distribution tax has been introduced on equity-oriented schemes. In one of our previous articles, we have highlighted why one should consider growth option and not dividend while investing in equity-oriented schemes. So, once again the budget changes nothing.
These are the basic questions that one may consider. Else, Union Budget should be a non-event for most of us and life should go on irrespective.
It is important to spend more time on one’s household budget than the Union Budget.

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