Posted: 04/02/2013 11:56 AM IST

The union budget was announced today, and as expected there was a lot of excitement around it, and a lot of ink (more electronic than real) will be poured over it in the days to come.

Because most articles talk about the budget in terms of how it affects you, it is easy to lose sight of the fact that this is a union budget and as such is a statement of how the government plans to spend and earn money in the coming year.

This is also an expectation, which means the actual numbers will be different when the financial year 2013-14 ends. For example, the revised estimate of the expenditure in 2012-13 is at 96% of the budget estimate. So the government spent 96% of what it said it would during the last budget.

The spending was no doubt slowed down because of the growing concerns about fiscal and current account deficits.

Fiscal Deficit

If you had to just see one number to assess the government’s finances you would look at the fiscal deficit.

Fiscal deficit is the amount of money that the government needs to borrow in a year because their expenses were more than their revenues.

In the last budget, the finance minister had given a fiscal deficit target of 5.1% of GDP.  The actual deficit this year was 5.2% of GDP, and the FM has targeted a fiscal deficit of 4.8% next year.

You can reduce the deficit by generating revenues or lowering expenses, and in this context, Para 185 of the budget speech sums up the budget in an excellent manner.

The para says that as a result of the budget there will be a direct tax yield of Rs. 13,300 crores, and an indirect tax yield of Rs. 4,700 crores, so a total gain of Rs. 18,000 crores.

Current Account Deficit

The current account deficit is the difference between a country’s imports and exports, and India has a big current account deficit of $75 billion in the current year, and this has to been typically financed from FII and FDI inflows.

The FM emphasized that India is not in a position to spurn foreign investors and welcoming foreign investment is an imperative, not a choice. With this in mind, he has taken certain measures related to FIIs like allowing them to participate in the exchange traded currency derivative segment within certain conditions, and use their investment in corporate bonds and Government securities as collateral to meet their margin requirements.

I won’t detail out everything here, but the theme is that the country needs to get more foreign investors in to plug the current account deficit, and more revenues in to plug the fiscal deficit, and try to control the much talked about twin deficits of India.

With that said, let’s take a look at the specific measures in the budget that will affect you personally.

How does the budget affect you?

Tax deduction for your first home loan: I think this might become the single most talked about feature of the budget as far as the individual is concerned as it is about the two things we love the most tax deductions and real estate.

Currently, there are two sections that deal with tax deduction on home loans. Section 80C deals with the principal part of your home loan and Section 24 deals with the interest part.

Section 24 caps the interest payment deduction to Rs. 1.5 lakhs right now. The FM has said that an additional Rs. 1 lakh will be deductible on the interest part of your home loan for your first house only if you buy it during the 2013-14 financial year and the loan is less than Rs. 25 lakhs.

Rajiv Gandhi Equity Savings Scheme (RGESS): Rajiv Gandhi Equity Savings Scheme was announced in the last budget, and in this budget the FM mentioned that the scheme will be liberalized to include mutual funds as well as equity shares.

This implies that the list of securities that are eligible for RGESS will be broadened.

Currently you can invest in shares that belong to the BSE 100, CNX 100, Maharatnas, Navratnas, Miniratnas, FPO of PSUs and IPO of PSUs whose turnover is not less than Rs. 4,000 crores, and mutual funds or ETFs, which only invest in these securities.

Going forward, we will see a broader list of shares and mutual funds where you can invest to get the RGESS benefit.

Currently, there is an upper salary limit of Rs. 10 lakhs, which means that if you earn more than Rs. 10 lakhs you won’t be eligible to get the RGESS benefit. This limit has been raised to Rs. 12 lakhs.

The third thing about this is the investment time, right now you have to make your investments within a year but the FM has raised that limit to 3 years. The maximum limit to investment was Rs. 50,000 and that hasn’t been changed. There was a lock in period of 3 years and that hasn’t gone away either.

Interest on EPF: Interest on employee provident fund was reduced from 9.5% to 8.25% in the days leading to the last budget, and just a few days ago this was raised to 8.5%.

Inflation linked bonds: The FM has spoken about issuing inflation linked bonds and it needs to be seen what they are linked with CPI, WPI or something else?

There is value in these bonds only if they can get you after tax returns greater than current tax free bonds, FMPs or debt mutual funds, and you shouldn’t be too excited about these bonds before you find out that they offer a sweeter deal.

Direct Tax Code:  As is custom, DTC wasn’t implemented this year, but there’s a plan to implement it next year.

Tax Free Bonds: In the last two years, companies like PFC, REC, and IIFCL etc. have issued tax-free bonds which allow you to lock in to interest rates which are a little lower than the prevailing 10 year G-Sec yield, and the coming financial year will also see the issue of tax free bonds.

Income Tax Slab: In the last budget, the FM had made the tax slab uniform for men and women, which was a big move, but this budget saw no changes in the tax slab. The FM did however announce a tax credit of Rs. 2,000 for every person who has a total income of Rs. 5 lakhs.

Surcharge on the Super Rich: I liked how the FM said, “There are 42,800 persons let me repeat, only 42,800 persons who admitted to a taxable income exceeding `1 crore per year. “

The people who admitted to making more than a crore have an extra surcharge of 10% for the current financial year.

Dividend Distribution Tax (DDT): The DDT has been raised form 5% to 10%

Securities Transaction Tax (STT) on Equities: STT has been reduced in equities, and MFs as shown below.

Equity Futures     0.017% to 0.01%
MF/ETF redemptions at fund counters     0.25% to 0.01%
MF/ETF purchase/sale on exchanges     0.1% to 0.001%


Securities Transaction Tax (STT) on Commodities: There used to be no STT on commodities but now the FM has brought in a STT of 0.01% on non-agricultural commodities trading.

Conclusion

The reality of the current economic situation is there is really no room for giving tax breaks or increasing deductions, and that will continue to remain the case until the high fiscal deficit comes under control.

The FM said in his speech, “We must redeem our promise by 2016-17 and bring down the fiscal deficit to 3 percent, the revenue deficit to 1.5 percent and the effective revenue deficit to zero.”

And to me, redeeming this promise is the most important thing for the government; nothing that affects you individually can become positive if the deficits aren’t controlled.

Let’s hope that the promise is redeemed, if not wholly or in full measure, then at least, very substantially.