A cheerful budget for the aam aadmi, and possibly markets

By Prakarsh Gagdani

A cheerful budget for the aam aadmi, and possibly markets

In many ways the budget 2019 has been different and it promises to bring big relief for the Aam Aadmi. With direct cash to farmers, pension for unorganised workers and tax break for middle class, we see a new way of populism. Knowing that this is a pre-poll budget, it is definitely a master stroke by the current government.

Of all the major announcements, the hike in tax rebate has been the most-awaited announcement. One of the major distress points for the common salaried man has always been the income tax. The move to increase the income tax rebate limit for individual with taxable income upto Rs 5 lakh is expected to benefit 3 crore tax payers. Moreover, individuals availing the Rs 1.5 lakh deduction u/s 80C, will not be required to pay any income tax up to gross income of Rs 6.5 lakh. Such a person would be saving tax of Rs 12,500 compared to the tax payable in current FY 2018-19.

Even though the basic exemption limit and tax-slabs remain the same for taxpayers with annual income beyond Rs 5 lakh, the government has increased the provisions of tax saving for them too. It has proposed to increase the standard deduction limit to Rs 50,000 from Rs 40,000 earlier and also raised the TDS limit on bank deposit interests to Rs 40,000 from Rs 10,000 currently. This will benefit small depositors and non-working spouses and ultimately get more savings in the household. Further, the New Pension Scheme (NPS) has been liberalized by increasing the government contribution from 10% to 14%, while keeping the employee contribution same at 10%. 

In addition, a number of measures have been announced with respect to tax around real estate. Notional rent on the second self-occupied house has been done away with; benefits of rollover of capital tax gains will be increased from investment in one residential house to two residential houses for tax payer having capital gains up to Rs 2 crore; and TDS threshold of deduction of rent u/s 194-I has been increased from Rs 1.8 lakh to Rs 2.4 lakh.

All in all, this is the budget which India needs for the growth in household savings. The budget has indeed put more money in the hands of the salaried class and this increase in savings can be channelized into long-term investments, either through the traditional route or through capital markets. To my belief, the tax relief has been a major announcement and impact of this will be seen over time in increased participation in the capital markets. That way, the domestic flows could possibly counter-balance global liquidity fluctuations.