18089 SIP myths you must know!

The world has undergone unimaginable changes in one year since finance minister Nirmala Sitharaman presented the Union budget on February 1, 2020. The Covid-19 pandemic was still in its initial stages, with the first case in India being detected barely days before the budget presentation.

Within weeks, it spread across the country forcing the government to go for countrywide lockdown to check the contagion. As Sitharaman rises to present the budget, India has witnessed a year of Covid-inflicted pain resulting not only in ill health of millions but also acute economic slowdown and job losses.

The silver lining has been the sharp recovery in the stock market after a steep collapse in late March after the lockdown announcement. Stock indices such as BSE Sensex and Nifty 50 are now ruling at record highs, on hopes of  smart economic recovery and the Covid-19 vaccine. With economic recovery post-Covid-19 still in its nascent stages, there would be great expectations that the Finance Minister will keep an eye on the wallets of the common man.

As every year, people’s wish-list would be many. The ordinary tax-payers will expect the FM leave some extra cash watch in their hands. However, it is unlikely that the existing income tax rates would see any major changes as the government would prefer a stable regime.

In the Budget for 2020-21, Sitharaman had proposed a new alternative personal income tax regime for those not availing any tax exemptions. It would be interesting to know how many taxpayers availed of the new regime.

However, the finance minister may to raise the standard deduction from the extant Rs 50,000.

Also, at a time when the government needs money to tackle rising fiscal deficit, do not expect increase in basic exemption limits.

Capital market participants would look for relief on the tax imposed on long term capital gains (LTCG) two years ago. LTCG on selling of shares or equity funds after holding of one year was previously tax exempt. Now, LTCG over Rs 1 lakh on listed equity shares is taxable at the rate of 10% without the benefit of indexation. However, a good rally in stock market makes it a potential revenue generator on the LTCG front, which the government might like to take advantage of to bolster its coffers.

The Finance Minister might also look at raising the deduction limit under Section 80C of the Income Tax Act from Rs 1,50,000 or provide a higher deductions under Section 80CCD (1B) for National Pension System investment. from the current Rs 50,000. A doubling of the NPS deduction will have multiple benefits. Besides tax saving, a stronger flow into NPS would improve the old age income security net.

The Covid-19 scare has put the focus on health insurance to cover for rising medical costs. The government might increase the deduction on health insurance.

Providing boost to the struggling housing sector would be a focus area of the government. A flourishing real estate sector has a positive impact on the economy by creating demand for inputs such as cement and steel, and creating jobs. This would also push the potential buyers to finalise pending home deals.

Sitharaman may also tweak the deduction on the interest portion, from the present Rs 2 lakh, on the housing loan for self-occupied property.

Also under consideration would be the continuation of the Credit Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awas Yojana through which the government aims to help the lower income and the economically weaker strata to purchase homes by stepping in with interest subsidy to grant relief on the repayments and thereby encourage home buying.

Sitharaman will have to strike a fine balance between the taxpayer’s wish for further relief with the Covid-19 havoc fresh in everybody’s minds and the government’s needs for revenue generation to provide a fillip to the economy.

(Views are personal)