Recap: What Budget 2023-24 meant for personal finance planning

17 Jan 2024 , 09:25 AM

BUDGET 2023-24 WAS A BUDGET OF GREAT EXPECTATIONS

In a sense, Indian taxpayers almost wanted everything to happen in the previous budget. They know that Budget 2023-24 would be the last full budget presented by the NDA government since the Budget 2024-25 would be an interim budget. There were demands for tax slabs to move higher, they wanted more exemptions and also demanded exemptions on tax on long term capital gains and dividends. In addition, they also wanted the securities transaction tax (STT) to be fully scrapped, or at least reduced to a more reasonable level. Obviously, the expectations were steep and the mindset was like, “When we have to dream, as well dream in colour.” Government could only accede to some of these demands.

However, it must be said to the credit of the Finance Minister and the central government that Budget 2023-24 was people-friendly in more ways than one. Above all, it made some significant changes in the budget, which would effectively put more money in the hands of the people, simplify tax provisions and help the stressed middle class to successfully offset the impact of rising inflation. Investors expected the government to go all-out to please the middle class, so the Budget had to find a middle path. While giving the tax payers a lot to cheer about, the budget also held its own against the temptation of too much extravagance. Here we look at some of the budgetary changes in the February 2023 Union Budget which had long term implications for personal finance planning.

COMPENSATING FOR HIGH INFLATION AND HIGHER INTEREST RATES

Budget 2023-24 had to be a budget that pandered to the middle class. Inflation had shot through the roof in 2022 and that had resulted in a series of rate hikes by the RBI. Not surprisingly, the finance minister Nirmala Sitharaman had already underlined the need to take care of the middle class. It was a triple whammy for the middle class in early 2023. Inflation was soaring, spending was hesitant due to slowdown fears and interest rate and EMIs on loans was going up. Clearly, the government had to put more money in the hands of people to ease this triple burden. The rebate system was not changed, but the base tax free income was effectively increased from Rs5 lakhs to Rs7 lakhs. 

To reduce the amount of paper work for lower income groups, the tax exempt limit was raised from Rs2.50 lakhs to Rs3.00 lakhs. Hence, tax filing was mandatory only if total income was above Rs3 lakhs. In addition, the rebate system was also adjusted in such a way that the base tax-free income level moved up from Rs5 lakhs to Rs7 lakhs. Here we are assuming that a person shifted to the new tax regime (we will discuss this elaborately in the next point). While the new tax regime (NTR) would entail foregoing all exemptions, the base standard deduction of Rs50,000 for salaried class and pensioners has been retained. This will effectively take the minimum tax-exempt income up to Rs7.50 lakhs. That was intended to reduce the tax burden on people and to offset some of the stress of higher inflation and higher EMIs on loans.

TWEAKING NEW TAX REGIME (NTR) WAS THE BIG STORY OF BUDGET 2023-24

The new tax regime (NTR) had been existing for some time, but the buy-in was just about 8% of tax payers. The Budget 2023-24 made a move towards making the NTR genuinely more attractive to the tax payers. To begin with, the new tax regime (NTR) becomes the default tax regime for all tax payers from FY23-24 onwards. Going ahead, people have to specifically opt for the old tax regime. But for that to happen meaningfully, the Budget 2023-24 made the NTR genuinely more attractive. Here is a quick look at the new tax slabs assumed in the new tax regime from FY24 onwards, compared to the previous NTR.

Tax Slab	Tax Rate (NTR till  FY2022-23)	Tax Slab	Tax Rate (NTR from  FY2023-24)
Up to Rs2.50 lakh	Nil	Up to Rs3.00 lakh	Nil
Rs2.5 lakh – Rs5.0 lakh	5%	Rs3.0 lakh – Rs6.0 lakh	5%
Rs5.0 lakh – Rs7.5 lakh	10%	Rs6.0 lakh – Rs9.0 lakh	10%
Rs7.5 lakh – Rs10.0 lakh	15%	Rs9.0 lakh – Rs12.0 lakh	15%
Rs10.0 lakh – Rs12.5 lakh	20%	Rs12.0 lakh – Rs15.0 lakh	20%
Rs12.5 lakh – Rs15 lakh	25%	Above Rs15 lakh	30%
Above Rs15 lakh	30%

Why is this shift significant from a personal finance point of view? Firstly, it simplifies the tax regime for most people. Secondly, as we shall see later, there is genuine saving in tax in the new regime and it is significant. That adds to you investable surplus. Thirdly, that is the right financial planning approach. You keep taxes separate and investment strategy separate. In the NTR, you are not forced to mix tax saving and investment strategy. Financial planners can now look at investing as a distinct function, independent of managing taxes. 

In the new regime, not only has the base exemption limit been raised, but even the number of slabs has been reduced and the slabs modified to benefit tax payers. If you add the additional standard deduction benefit of Rs50,000, the impact on money in hand for people is a lot higher. A quick look at the calculations suggests that for any income tax payers with annual income of around Rs15.50 lakhs, the NTR will result in an additional tax benefit of Rs52,500 per fiscal year. That adds around 3.5% to your annual income, purely via tax tweaks and the rationalization of slabs in the new tax regime (NTR).

Pampering the higher income groups too

There is merit in pampering the higher income groups for any economy. While the middle class has a higher propensity to consume, it is the higher income groups that have a higher propensity to save and invest. Beyond a point, the tax on the higher income groups was too steep for comfort. A person earning more than Rs2 crore per year was paying 42.74% tax, which was just too high by comparative global standards. India had those kind of tax rates during the punishing regimes of the 1970s. Also, lowering the tax burden on the higher income classes means a lot more of investment leeway available to them. There has been a persistent demand to reduce the peak rate of tax in India to 30%, but that may still be some time away, although Budget 2023-24 has taken a step in the right direction. 

Fortunately, Budget 2023-24 took the first step in this direction. The Union budget 2023-24 cut the peak surcharge levied on higher income groups from 37% to 25%. Thus, the highest effective rate of tax would payable by the higher income groups 42.74% to 39%. It may still be far from the targeted 30%, but freeing up 3-4% of the incomes of the higher income groups, frees up substantial funds This would be instrumental in boosting the spending power for higher end products and will also make more of funds available for higher risk assets like equities, REITs, INVITs, structured products, etc. 

Expanding small savings and more for individual investors

For years, Indians have fallen in love with government small savings schemes for a number of reasons. They are absolutely safe; the rates of return are attractive and most of them carry additional tax sweeteners. The net result is that people have traditionally been discontent with the limits on government savings offerings and want more. Here is some good news for Indians. The Budget 2023-24 introduced “Mahila Samman Saving Certificate”, a one-time small saving scheme for women. This entails a deposit of up to Rs2 lakhs for a 2-year period and such deposits can be made till March 2025. These deposits earn assured interest of 7.5% with partial withdrawal option. 

The Budget also doubled the peak deposit limit under the Senior Citizen Saving Scheme (SCSS) from Rs15 lakh to Rs30 lakh. The peak deposit limit for the Monthly Income Plan (POMIS) from was also doubled from Rs4.50 lakh to Rs9.00 lakh for individual accounts and to Rs15 lakh for joint accounts. There is a big bonus for non-government salaried employees retiring. They can now take home tax-exempt leave encashment on retirement of Rs25 lakh against the previous limit of Rs3 lakhs. That is big news to enhance your post-retirement wealth and also adding some conservatism to your financial plan. 

Not just tax friendly for individuals, but for small business too

In the last few years, several professionals, MSMEs and small individual proprietorship businesses and partnerships have made the best of the presumptive tax scheme under Section 44AB. Under the scheme, no books of accounts have to be maintained, and no audit of accounts needs to be done. The individuals in business or profession can presume taxable income at 6% of the total turnover as the presumptive income, provided 95% of the income is received through banking channels. Otherwise, the presumptive rate tax is 8%. The problem was that the limit was still small. Now the base threshold for availing Section 44AB has been increased from Rs2 crore to Rs3 crore for small enterprises. At the same time, for professionals, the limit has been enhanced from Rs50 lakhs to Rs75 lakhs. Of course, this also means that no exemptions can be claimed, but it is still worth the trouble.

Why was Budget 2023-24 significant for your personal financial plan

Here are a few reasons why the relevance of the budget needs to be underlined.

• The budget took genuine efforts to combat the negative effects on your personal finances emanating from higher inflation, rising rates and slowdown risks.

   

• The modified new tax regime (NTR) was redesigned in a way that it made a substantive difference to the surplus post tax. More importantly, it demarcated tax saving from investing and insurance; one of the basic pre-requisites of financial planning.

   

• The Budget 2023-34 was rational in the sense that it didn’t just address the middle class, but also the wealthier class. After all, it is the people with higher income levels who have a much higher propensity and capacity to save and invest.

   

• In the rush for equities, debt as an asset class has taken a back seat for most individuals. That is evident in the mutual fund flow data. The special thrust on expanding the appeal of small savings schemes is a good way to shift the attention to debt products too.

   

• Lastly, India is seeing the animal spirits of capital through the thousands of young and able professionals taking the entrepreneur route. They need a tax regime that is friendly and not too burdensome in the early days. The tweaks to the presumptive tax scheme will pull a lot of these businesses in to financial planning early.

To sum up, the Budget 2023-24 had some significant measures to enhance the personal finance planning process.

Devil’s Advocate – Not all was hunky dory in Budget 2023-24

If the Budget 2023-24 was a boost for financial planning, it also had its downsides. Firstly, the income from insurance policies having premium above Rs5 lakh per annum will now be taxed (except death benefit) from April 2023. The assumption is that you are rich enough afford to pay tax. Secondly, Section 54 and Section 54F benefits of saving capital gains tax by reinvesting the proceeds in property is not restricted to properties worth Rs10 crore only. This is again to put some tax liability on purchase of luxury properties. Perhaps, the most significant downside from a financial planning perspective was to exclude pure debt funds (equity less than 35%) from the definition of long term capital gains. Irrespective of holding period, the tax will be at the peak rate applicable in such cases.

At a more basic level, one can protest that the Budget 2023-24 did not do anything for making investments or housing more attractive. However, within the constraints the government has put its best foot forwards in giving more power to the personal finances of individuals. The ball is now in the court of people, how they use these benefits prudently.