The Union Budget for the fiscal 2011-12 was presented by the Finance Minister on 28th February, 2011. The guiding principles of the budget seemed to continue along the lines of attempting to control inflationary trends whilst not impacting aspirations for economic growth of the country. The impact on personal taxation and/or savings and investments, however, is only marginal.

The immediate reaction to the Budget has been mixed. Whilst there is some positive sentiment from the budgets balanced approach to control inflation with continued focus on growth; there are some concerns about the budget assumptions on revenue collections and fiscal deficit. The jury is out and will be watching the fiscal deficit and the government’s delivery of promises made.

The budget was lukewarm on big announcements. Whilst there was not much to speak of in terms of infrastructure; most reform bills got a mention for ‘future action’ including the long pending insurance bill.  The announcement to allow foreign investors to invest in Indian mutual funds was positive; but implementation challenges may not result in large retail inflows.

The challenge is to build retail participation in Indian Mutual Funds and Insurance investments – and that unfortunately has not been addressed in the budget.

Personal Taxation

  • The key change in this category was the increase in exemption limit on taxable income from Rs. 1.6 lacs to Rs. 1.8 lacs for general tax payers. This would translate into a potential saving of Rs. 2,000 on your taxes in the year 2011-12. The exemption limit for women remains unchanged at Rs. 1.9 lacs while for Senior citizens the limit has been increased from Rs. 2.4 lacs to Rs. 2.5 lacs.
  • The age for qualifying as a Senior Citizen has been reduced from 65 years to 60 years.
  • The Budget also introduces a new category of Very Senior Citizen (age 80 and above) with an exemption limit of Rs. 5 lacs.
  • The tax slabs, other than the changes mentioned above, remain unchanged from the previous year.
  • The provision for infrastructure bonds to avail a tax exemption of Rs. 20,000 under Section 80CCF has been extended for the coming fiscal. This allows an additional tax exemption of Rs. 20,000 over and above the Rs. 1 lac limit under Section 80C.

Personal Finance

  • Life insurance premiums are set to rise with an increase in service tax proposed for traditional products. The finance bill proposes a 50% increase in Service tax on traditional plans which currently charge a 1% service tax on the premium amount. This could translate into a 50 basis points (bps; 100 bps = 1%) increase in your premiums for such products.
  • For Unit Linked Insurance Plans (ULIPs), it is proposed that service tax be levied on premiums not allocated for investments i.e. charges such as premium allocation charge, policy administration charge etc. Currently service tax is applicable only on mortality and fund management charges. This change could mean a slight reduction in your investment yields from these plans. Industry experts believe this reduction could be in the range of 20-50 bps. However, there is still some clarity awaited if service tax would be a part of the overall cap on charges put by IRDA last year. If so, the net yield would not be impacted as such.
  • The budget has also increased the number of segments which come under the purview of Service Tax. The key one here specified categories of hospitals and diagnostic centres. Any air conditioned hospital with more than 25 beds will now have to charge service tax on its bill. This step has seen strong reactions from the health care industry. Some of the arguments being put forward for a reconsideration of this provision being that a large proportion of a hospital bill includes costs of medicines and other consumable which are not really ‘services’.
  • There is no change in the budget for mutual fund investors.
  • The Direct Tax code is slated to be finalised in the current fiscal for implementation in April 2012.

The Life Insurance Industry has asked for amendments to the draft DTC to provide for continued benefits under Section 10 D for investment in life insurance and separate limits for premiums paid for life insurance & pension plans