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Budget 2020 Will Change The Way You Think About Your Money logo 06-02-2020 Adhil Shetty

The Union Budget 2020 is going to change the way Indians look at investing, insuring, taxation, and savings. The Finance Minister Nirmala Sitharaman proposed a dual taxation system – one, where you will be taxed as per existing slab rates, and a second, optional one where you’ll pay lower taxes but will have to forego most tax deductions available to you under the Income Tax Act.

In Pics: Key points and highlights from Budget 2020

There were other announcements in the budget that will impact your investments. So let’s take a quick walkthrough of how your life will change from April 1, and what you can do to make the most out of the announcements.

Aim For 20% Deductions

The new regime aims at simplification of taxation. However, do not be lulled into thinking that it’s the best option for you. The old regime may be still be a better option for you in certain circumstances. If you want a generic advise, consider the following. If your income is up to Rs. 20 lakh in 2020-21, aim for total deductions of 20%.

So, for example, if your income is Rs. 10 lakh, aim for deductions of Rs. 2 lakh through a combination of standard deduction (Rs. 50,000), Section 80C (up to Rs. 1.5 lakh), 80D (Rs. 25,000 to Rs. 1 lakh), Section 24b (up to Rs. 2 lakh), and any other deductions you’re eligible for.

At Rs. 10 lakh, your tax without deductions under the old rules is Rs. 1.17 lakh; under the new rules, it falls to Rs. 78,000. But with 20% deductions, your taxes fall further to Rs. 75,400. Therefore, it is better for you to seek deductions to save taxes, create wealth, and insure yourself. So before you switch to the new regime, compare your taxes under either systems. If you can deduct 20%, you may be better off in the new regime.



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Invest In FDs But Beware Of Low Returns

The FM announced a five-fold hike of bank deposit insurance cover provided by DICGC. It means that your savings and deposits in any combination with a commercial or cooperative bank are guaranteed up to Rs. 5 lakh, in case the bank undergoes liquidation.

This would encourage you to invest with small banks that provide higher interest rates on deposits. But remember to not go overboard with FD investments because their post-tax returns are low. For example, if you’re in the 20% tax slab, your post-tax returns on a 7% FD would be only 5.6%.

Therefore, locking up a large part of your income in a low-return instrument would not be good for your finances overall. If you’re a young person, you should use FDs only to manage your immediate liquidity requirements and invest more in market-linked instruments such as mutual funds that provide higher returns.

Also watch: How household savings can impact GDP growth (Video by Moneycontrol)


Incentives Available For Budget Housing

The budget did not renew the credit-linked subsidies provided to eligible homeowners in middle income groups. However, the FM did extend the benefits provided under Section 80EEA for one more year. We’ve seen that there’s a clear preference these days for budget homes.

They’re smaller, cheaper, easier to finance, and better for nuclear families in urban areas. One of the best ways to earn tax deductions is through home loans. Assuming your home loan is eligible for 80EEA deduction, you can stretch your total deductions through a home loan alone to Rs. 5 lakh, which makes staying in the old regime a better option. Therefore, with the availability of choice real estate inventory, low loan interest rates, and large tax deductions make this a good year to buy a budget home.

Mutual Funds Investment Continue To Be Attractive

The budget had proposed that a 10% TDS be applied to mutual fund dividends. The wording of the proposal caused the confusion that mutual fund gains would also be taxed similarly. However, now the Income Tax Department has clarified that only dividends are to be taxed if such income exceeds Rs. 5000 in a year.

Indian currency notes © Getty Indian currency notes

Let’s also examine mutual fund investment from the point of view of switching to the new tax regime. If your intention is to switch, you can forget about tax-savings and focus simply on wealth creation, for which mutual fund SIPs are perfect. But if you stayed in the old regime, ELSS mutual funds continue to be one of the best ways to combine tax deductions with wealth creation. As such, young investors can skip dividend mutual fund schemes to focus on growth-oriented schemes for faster appreciation of their wealth.

Don’t Ignore Insurance

In India, people buy life and health insurance policies simply to save taxes. This is the wrong approach. The primary benefit of any insurance is financial protection. Tax savings are secondary benefits. So even if you switch to the new regime, continue buying life and health insurance. Going without coverage can put your family and finances at great risk.

Term insurance is ideal for those looking for a cost-effective way to insure their lives. A family floater plan for you, your spouse and child, and another plan for your dependent parents can not only provide deductions but also give you peace of mind in a hospitalisation.

The old regime vs. new regime debate may continue this whole year. Taxation is a complex subject. When in doubt, use our income tax calculator or consult a tax advisor.

The writer is CEO,

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