Mr. Mohammadali Saiyed
Mohammadali Saiyed is responsible heads the Finance Function at NJ. He is a member of the ICAI and is associated with NJ for almost 10 years now.
ES: What is your broad view on the Budget 18-19, especially proposals with respect to Personal Finance?
MS: Broadly if you see, the Finance Minister has tried to balance out the overall budget, however we can see that thrust has been given to areas such as rural development, agriculture, health, education, employment, MSME and infrastructure sectors.
The Budget has been generous with senior citizens. They will get higher tax rebates for health expenses, in addition to a number of other benefits announced.
The Budget has announced World's largest Health Protection Scheme covering over 10 crore poor and vulnerable families launched with a family limit of upto 5 lakh rupees for secondary and tertiary treatment, and also a scholarship scheme for meritorious students with a caveat that such students could spend some time teaching in educational institutions.
According to PM Modi, The Budget 2018 is focused on creation of a new India. According to him, the Budget is 'Farmer friendly, business friendly and development friendly'. He emphasized that the government needs to consolidate farmers' incomes as the country has seen large boost in agricultural production. "It must be noted that this Budget has given importance to ease of living alongside ease of doing business," were PM Modi's words after the budget speech.
For more information on budget, we have the budget section available on e-Saathi which provides important updates such as budget docs, AMC/Expert views & news.
The budgetary announcements impacting personal finance of Indians are listed below:
- Introduction of Long Term Capital Gain Tax on Equity & Equity Mutual funds. There is a proposal to tax LTCG @ 10%. No Indexation benefits will be available.
- Introduction of Dividend Distribution Tax (DDT) @ 10% on dividends declared by Equity & Equity MF, however dividend will be tax free in the hands of the investors.
- A standard deduction of Rs 40,000 in lieu of the present exemption in respect of "transport allowance" and "reimbursement of medical expenses" is proposed to be allowed to individual tax payers.
- There is no change in the rate of tax for individuals, however "Education Cess" and "Secondary and Higher Education Cess" on income tax at 3% shall be discontinued and a new cess "Health and Education Cess" is introduced at 4% of income tax including surcharge.
Proposals for Senior Citizens:-
- Interest Income & TDS: Exemption of interest income on deposits with banks and post offices proposed to be increased from Rs. 10,000 to Rs. 50,000.
- TDS not required to be deducted under section 194A. This benefit is also available for interest from all fixed deposit schemes and recurring deposit schemes.
- Standard deduction of Rs 40,000 introduced in the budget speech, also applicable to pensioners.
- Pradhan Mantri Vaya Vandana Yojana (PMVVY): This scheme is extended up to March 2020. Investment limit under the scheme is also proposed to be increased to Rs. 15 lakh from the existing limit of Rs. 7.5 lakh per senior citizen.
- Section 80D: Hike in limit for health insurance premium and/or medical expenditure from Rs. 30,000 to Rs. 50,000.
- 80 DDB: Increase in limit for medical expenditure for certain critical illnesses from Rs. 60,000 (in case of senior citizens) and from Rs. 80,000 (in case of very senior citizens) to Rs. 1 lakh.
ES: What are your views on the much awaited announcement - Introduction of the LTCG Tax? Do you think that LTCG is a welcome move by the Govt.? Further, what would you say to investors who are in doubts about the LTCG tax calculations etc.?
MS: As far as Introduction of LTCG is concerned, it is all a Government prerogative; what, when and how to tax. We have seen in the past that many direct & indirect taxes were introduced and also removed, it keeps on changing. I personally believe it is something that the Government decides based on the overall direction that's set for the economy to tread on.
Coming to LTCG, I believe there is no reason to panic as far as LTCG tax introduction is concerned. Earlier, LTCG Tax was there and it was removed in 2004 by the then government. Now, after 14 years it has been re-introduced. So it is not the case that it is introduced for the very first time in the Indian taxation history. Further, if you do some analysis about capital gain levy, LTCG tax is levied by most countries. Also if you compare the tax rate which has been proposed i.e. @10%, then also its very competitive & provide level playing field for both Indian as well as global investors.
There is a lot of literature available about LTCG tax on public domains, many experts' views are also available. One can read and understand that there is no reason to worry at all, with respect to LTCG Tax.
ES: How are you going to assist NJ Partners & Clients with respect to this change in LTCG tax?
MS:Very Good question. So as the very first move, we have already published an article that explains the changes which are proposed, related to LTCG tax calculation. Further, we also shared a capital gain calculator to help partner/client get a tangible understanding on capital gain liabilities related calculations. One can download it, punch the key details and get the output. The calculator uses the grandfathering cut-off date of 31st January 2018 to calculate the LTCG. It will be especially useful for investors with a large equity MF portfolio.
We have also uploaded FAQs in that article, which were published by the Ministry of Financ e. These FAQs provide greater insights about LTCG related impacts and will be helpful in solving most doubts about the LTCG tax.
In few days time, we will upload our MF Customized Profit & Loss report on the client desk which will be compatible with LTCG related changes. The report will use the grandfathering cut-off date of 31st January 2018 to calculate the LTCG. Further, we have also planned to incorporate changes pertaining to Mutual Fund Scheme Merger which were already in effect since 01 April 2016, and are not covered in the report currently.
I am sure that the above developments will help the partners / clients to a great extent.
ES: Could you please guide our partners and clients by providing a simple working on how LTCG will have an impact on Investments?
MS:Yes sure. The short note/article that we published, explains LTCG calculations for 4-5 scenarios and I believe it would be very helpful for anyone to understand how grandfathering will work. However, with the help of below example (indicative one), let me try to explain the pre and post LTCG scenario on gains, tax to be paid & returns (CAGR).
It is important to note that there will be no Indexation benefit available while calculating LTCG.
Now, coming to set off and carry forward of STCL & LTCL. Post budget LTCL from a transfer made on or after 1st April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other LTCG and unabsorbed LTCL can be carried forward to subsequent eight years for set-off against LTCG.
To address the query which many people ask about what will be the case with Bonus shares & Rights, it is been clarified by the Ministry that the LTCG for these shares will be arrived at by considering the Fair Market Value on 31st January 2018.
ES: ELSS is the best Tax saving solution available in the Indian market, so how it will be impacted?
MS: At NJ, we don't think that LTCG Tax will have any adverse impact on ELSS investments flow. There could be some confusion existing in the minds of the investors with respect to LTCG, let me clear out few points.
After introduction of LTCG tax, there are 2 main points that one should take into consideration while investing in Equity oriented Tax saving scheme (ELSS):
[1] If you redeem after 01st April 2018, then the investor is liable to pay LTCG @ 10% rate. If you have already completed the three year lock-in period and you redeem your investment on or before 31st March 2018 then No LTCG tax will be applicable.
[2] At the proposed 10% tax rate, there would be a marginal impact on the overall return. In your earlier question, we have discussed the same.
Further, The LTCG tax is unlikely to impact much to a small investor who invests via SIP for short or mid-term. Let us assume that on April 1, 2018, you start a monthly SIP of Rs 5000 for five years, earning a moderate CAGR of 10 per cent. By March 31, 2023, five years later, your invested corpus of Rs 300,000 grew to Rs 390,412. For the purpose of LTCG calculation, let's say you liquidated the entire investment after all the units get qualified for LTCG Tax, i.e, on April 2, 2024. Let's assume, the fund grew 10 per cent more in this last 1 year period, valuing the investment at Rs 437,261 on April 2, 2024. Your total LTCG here is (Rs 437,261 - Rs 300,000) = Rs 137261. Of this, Rs 100,000 is exempt from LTCG Tax. On the remaining amount i.e. on Rs. 37,261 – you will pay Rs 3,726 as tax.
Thus, we can see from this example for a small investor It would take several years to create LTCG of more then Rs.1 Lakh and after that also the LTCG payable would be a small amount.
Now the general objective of investing in ELSS is tax saving, so the investor should consider two points while evaluating any tax saving product: One is Lock-in Period and other is Post Tax Returns.
ELSS has the potential to offer superior post-tax returns than other options available under Section 80C. It has offered double-digit returns in the past over long periods, whereas most other options available under Section 80 C offer single-digit returns.