Life after 80C

The budget of 2020 has come and gone. And left many of us thrilled and many of us, not so happy.

Whilst it’s quite normal that depending on the industry that we are in, there would be strong opinions on the efficacy (or the lack of it) of this budget, there is no denying the fact that the announcements on the personal income tax front has left quite many of us a bit dazed. Frankly we were not expecting it. Definitely not me.

I know, I know…..there has been some riddle in the writing so far but let’s get down to it. I was lead to believe that the low consumption phase that we(In India) have entered into would find it’s obvious solution in the hands of the Finance Minister – by making Indians richer by reducing taxes and thereby spur a rush to buy and push India back into the high consumption trajectory, once again. Whilst the FM and her interviews after the budget seem to imply this is what has happened, it is quite opposite on our side. There is significant confusion between the tax regimes so far and the one proposed and to make it worse, we now have to choose.

Without going into the specifics about each and every IT announcement and how it affects us let’s focus on the ones majorly influencing our savings and investment into mutual funds.

Dividend Distribution Tax (DDT) has been done away with. So far the dividends that we have been receiving from mutual fund units were tax free at the hand of the recipient. The dividend came our way after a tax was deducted, 11.45% and 29.12% for equity and debt fund respectively. However, in the coming fiscal this will not be valid. The dividends will not have DDT. But there is a twist.

The FM has imposed a 10% TDS on dividends above Rs. 5000. Thus the amount of dividend will be added to the total income of the recipient and the tax computation will be made on the basis of this calculation. If my total income, including dividends puts me in the 30% category, that is what I will pay, after making adjustments for the TDS already made.

Essentially the dividend has become a confusing source of income. If I am in the no tax zone, it does not really matter. If TDS is applicable and deducted, it will be refunded after the IT return is submitted and accepted without claim by the authorities. If however a claim is made by the IT guys then of course it’s a long haul to get the refund, as we all know.

Now let’s look at the other side. If I am in the highest tax bracket it makes ample sense to move away from dividend to the growth option and either use a Systematic Withdrawal Plan (SWP) or make conscious redemptions periodically. LTCG continues to remain the same and there is actually none applicable for amounts below one lac. So between dividend and long term capital gains, it is a lot more tax efficient to be in the redemption mode than in the dividend mode.

Another major announcement is in the removal of the various exemptions/deductions that used to guide our decisions on the forced savings side. The very popular ones like the insurance policies and PPF are now no longer applicable for tax deductions. This, although very unnerving for the present, is going to direct our savings and investment actions in the right manner without a colouring agent of section 80. If we are buying insurance, we would be looking at the efficacy of the plan and not its tax savings potential. If it’s retirement planning then definitely I would be looking for long term wealth creation tools.

This I believe is a major opportunity for the mutual funds to ramp up their play and create a product pool for long term retirement strategies which on maturity would convert into annuities or lump sum as desired by the individual. Insurance would be fuelled by term plans and PPFs would be a very popular tool for people relatively closer to retirement. The advisory services would also reorient itself to cater to need/goal based investing.

It is going to be a different ball game out there just two months from now. We can either crib or learn to make the best from the changed circumstances. Let’s choose the latter.

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