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BW Businessworld

For A Rainy Day

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Hoppy, the grasshopper, rues the day the Greek story-teller Aesop set eyes on Hoppy’s ancestor. Aesop snooped on the lives of Hoppy’s predecessor Mintu and his close friend Shelly — a hardworking ant.

The rest is history. Aesop penned (rather ‘quilled’) yet another popular fable, where he painted Shelly as an industrious ant and Mintu as a wastrel. Shelly was depicted as the one who worked hard to store food, while Mintu lived in the present and did not save for a rainy day. Aesop ended the story by extolling the thrifty virtues of Shelly even as Mintu starved when the rains and gales arrived.

Centuries passed, but Shelly and Mintu live on. Humans made a life-lesson out of the ant-grasshopper story. And now, new-age grasshoppers like Hoppy believe in saving for a rainy day.

They even employ financial planners to manage their wealth. No prizes for guessing who! Hoppy has taken on Tini —  the ant — as his wealth manager.

Here’s a tete-a-tete between Hoppy the grasshopper and Tini the ant. They are discussing the Union Budget.

The Pleasantries
Grasshopper: Hey Tini, beautiful day, isn’t it? It just makes me want to live really long!
Hello Hoppy! A beautiful day indeed. Just the right day for some stock-taking.
G: Stock-taking??? Of what, Tini?
A: Well, your finances, Hoppy. It has been a while since we discussed your investments. As a responsible wealth planner, I should be meeting you at least once in six months.
G: What’s the need, Tini? I am managing well… I think (Hoppy’s voice
trails off).
A: Saving alone is not good enough, Hoppy. Investments and portfolios have to be rebalanced to meet life-goals. You should consult your financial planner regularly — tell him about your financial health, your future payouts, etc. You should discuss the taxes you pay.
G: Why should I discuss my taxes with you? I’ll have to pay taxes anyway to the government (Hoppy wears a smirk).
A: Yes, you’ll have to pay taxes. But there are several ways to save on tax payouts, you see.
G: That’s interesting. I’m listening. (Hoppy is all ears; antennae are up)
A: Forget ants… You should learn from humans on how to save taxes. Recently, the Indians had their annual budget, where their government announced revenue and expenditure for the upcoming year. The most interesting part of the budget was the direct taxes section, which told them how much they could save every year.
G: Aah! That’s nice, Tini. You should tell me more about how humans save.
A: Their tax structure is quite similar to ours — in the insect world. And trust me when I say humans save a lot. Haven’t you heard of Buffett?
G: Hmm… Buffet! Sounds delicious (Hoppy smacks his lips).
A: Not that buffet, silly! Buffett is a rich man whom men revere. He made his entire fortune by saving and investing.
G: Tell me more, Tini. I’m really interested now. I’ll hop around the lawns some other day.
A: Okay. So hear me out. This is my latest research on humans and their saving habits. Much like ants, they work hard and collect money — which is a kind of multi-coloured paper. In exchange for money, they get to buy sugar and sweetmeats, as much as they want.
G: Oh Tini! I know all about that. You have told me about the human fascination for money a thousand times. Start from their budget.
A: Oops… sorry! I like talking about money — just like humans
(The grasshopper rolls his eyes in despair).

Direct Taxes
So, as I said, direct taxes is one of the interesting parts of a budget, prepared by humans — for humans (Tini wanted to flaunt his knowledge of American history, but Hoppy missed the cue completely). 
A: Before we start this journey, you should put yourself in the shoes of a human. Because only if you think like a human will you understand what I am saying.
G: Okay! Done. Let’s get started!
A: As is the case in every society, humans are required to pay taxes on their earnings.  That said, the lowest categories of earning members are exempted from paying taxes. So as per the recent budget, those earning less than Rs 2,50,000 per annum are not required to pay any taxes on their income. Now, this is a good move as the finance minister has left more money in the hands of low-salaried individuals. Raising the basic exemption limit by Rs 50,000 will help people save about
Rs 5,200 on tax payouts (Tiny shows Hoppy a tax slab chart).
G: (Gleefully) Hmm… that’s nice!
A: There’s more. People above 60 years of age will only be taxed if their annual income is more than Rs 3,00,000.
G: Aah… very far-sighted.
A: This is very common, Hoppy. The government gives more tax sops so people can spend. This helps the consumption-driven economy too. And there’s always something in the budget for senior citizens; this is to leave more money in their hands for retirement and medical care.
G: Oh! That makes more sense. But is this the only way to save on taxes?
A: No. Higher personal income tax exemption limit is just one of the ways. There are several other tax-saving measures too. For instance, the higher deduction limit under Section 80C...
G: 80C! Are we, by any chance, talking about automobiles here?
A: No. Section 80C of the Income Tax Act allows for deduction of certain expenses (and investments) from income. So your insurance premium, provident fund contribution, 10-year postal savings account, government-notified pension schemes, children’s tuition fees, part-payment of housing loan, et al, can be used to set off income. In effect, you can deduct all these payments from your income to arrive at the taxable amount. This brings down your tax liability significantly.
G: Great! So, what’s new in 80C, Tini?
A: (Smiling) The Indian government has increased deduction limits from Rs 1 lakh earlier to Rs 1.5 lakh. This will allow citizens to account for more expenditure (or investments) on taxable income and save on tax. People can now save up to Rs 16,800 through this route.
G: Great! That’s substantial. Are there more such tax-saving options?
A: One can also invest in specific asset classes to save on taxes.
G: (Antennae up) Golly, that’s even better, I must say! This will force humans to save more, I guess.
A: Right, Hoppy. You got it bang on.

G: So which asset classes are eligible for tax savings?
A: Let’s start with the ones that were mentioned in the budget. Housing, for some strange reason, is considered an investment and an asset in the human world. So, if you have a home loan, you can save on taxes there as well.
G: Wow! How’s that?
A: Hoppy, I presume you know that home loan is repaid at two different levels — the principal and the interest. You get tax deductions on both components, but among the two, the interest portion is structured for more tax relief. In the recent budget, the minimum deduction with regard to interest on home loans has been raised by Rs 50,000 to Rs 2 lakh. This will allow people to reduce their tax liability further. People may end up saving up to Rs 17,000 here.
G: That’s a relief for home loan borrowers who are always fleeced by banks and other lenders.
A: Well, there are caveats to this. The option is only available on loans taken to buy the ‘first home’ (or self-occupied property); it’s not applicable on loans taken to buy your second home, in other words, your ‘investment’ flat.
G: Not bad. That should take care of the smart alecs who try to misuse this route.
A: (Smiling) Yes, Hoppy. A lot of hard work goes into preparing a budget.
G: What are the other sops, Tini?
A: You are now tiring me out, Hoppy. But that’s okay. I will tell you more.
(Adjusting the cushion on chair)... The government has also raised the annual limit of investment under Public Provident Fund (PPF) from Rs 1,00,000 to Rs 1,50,000. The interest income from PPF is exempt from taxes on maturity. Currently, PPF accounts earn 8.7 per cent interest per annum.
G: Hey Tini! Can I open a PPF account?
A: Hold your horses, Hoppy! You hardly know anything about the product. PPF has a lock-in period of 15 years. Although it allows premature withdrawal, it’s not advisable. In your case, even if you live up to a ripe old age of one full year, you will not be able to enjoy the benefits of a PPF account. You need investment products that match your lifespan — say, products that mature in 6-9 months.
G: You are right, Tini. PPF isn’t a good option for me. I’ll certainly not live for 15 years. Anyway, forget it. Back to the budget then.
A: Apart from PPF, New Pension Scheme (NPS) has also become more attractive after the budget. Taxpayers can also use NPS contributions to reduce their tax liability. Deduction with respect to employee’s contribution to NPS is limited to Rs 1 lakh.
G: Is that again a long-term product?
A: Yes! It won’t match your lifespan. Humans can stay invested in NPS for 30-40 years.
G: Forty years is a long time. I wonder how they plan their retirement. I find it difficult to plan for a year, which happens to be a lifetime for me.
A: Lighten up, Hoppy!

Small Savings
G: Tini, is there anything for small savers like me?
A: Well, nothing specific. But the government has formulated an insurance scheme — Varishtha Pension Bima Yojana — for senior citizens. It has also asked the Employees Provident Fund Organisation to increase the coverage of employees and level up pension limits. But this will come at a cost. Wider coverage would mean more employees would be brought under the PF plan. New entrants will have to start contributing, which could reduce their take-home pay.
G: Hmm... That could be a problem.
A: The Indian government has also reintroduced postal savings schemes such as Kisan Vikas Patra and National Savings Certificate for small investors. These products yield 8-9 per cent interest every year.
G: These are good products, but post office circles don’t sell them well to investors. Their service levels are still not comparable to private investment managers and banks.
A: I agree.

The Pinch
G: Tell me, are there no dampeners in this year’s budget?
You are doing well! Interesting! Yes, there are a few things that may not go down well with taxpayers. For instance, the government has increased tax on gains made from investments in debt mutual funds (MF). So, now, you will be required to pay 20 per cent tax on debt fund portfolio gains.
I see. Investors were anyway paying tax on gains from bank deposits.
A: That is precisely the idea, Hoppy. The government wanted to bring about a level-playing field between debt mutual funds and other debt products. It has also increased the holding period on debt MFs from 1 to 3 years. So, debt MFs are not as attractive as they used to be, before the budget.
G: I would rather invest in a bank deposit. Why should I risk my investment in the market?
A: That is precisely what investors are thinking at the moment.
A: The government has also brought unlisted securities under the long-term capital gains (LTCG) bracket. You will have to pay LTCG tax if you are selling unlisted securities after three years.
G: My guess is that it will only affect rich investors who have investments in unlisted companies.
A: That’s not yet very clear. The government is yet to state which unlisted securities will come under the LTCG regime.
G: Will it be for taxmen to interpret and decide?
A: Yes, quite possibly.
G: How much will I be able to save if my salary is Rs 14.5 lakh per annum?
A: Let me see! (Tini starts work on a spreadsheet).
A: By using just the tax deduction route — that is 80C and housing loan interest — I can bring down your net taxable salary.
A: (A few minutes later) Okay, Hoppy! Your tax liability as per the old slab was Rs 1,83,000; after tax treatment, this has come down to Rs 1,47,000. Net effect, your total tax savings would come to Rs 36,000 (Tini shows Hoppy a tax slab chart).
G: Not bad at all.
A: But you can do better, Hoppy. You can use your company-provided car to increase your income. So, if you are entitled to a car, your taxable income will go up by about Rs 3,000. But then you can make good on the payout by claiming higher ‘car maintenance charges’ from your employer. You can also use your house rent receipts to reduce payouts. You can save a lot more if you claim leave travel concession in block years — that is twice in four years.
G: That’s brilliant…
A: Just plain adjustments. No great shakes!
G: Anyway, good you told me about the budget. It will help me save a lot more. Grasshoppers can save too!

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(This story was published in BW | Businessworld Issue Dated 11-08-2014)