Union General Budget 2015-16 : Income Tax Rates

Union General Budget 2015-16 : Income Tax Rates

Union General Budget 2015-16 : Income Tax RatesFinally our budget for the financial year is out. Finance Minister of India, Arun Jaitley presented the Union General Budget for 2015-16 in Parliament. Though there are few changes in the tax structures, the Personal Income Tax rates are untouched. Here is a broad view on the Income Tax rates set for FY 2015-16.

Income up to 250000   Exempted from Income Tax
250001 to 5 Lakhs 10% Tax
500001- 10 Lakh  20% Tax
Above 10 Lakhs  30% Tax

These rates are applicable citizens of both sex who are less than 60 years old.
Senior citizens who are above 60 years of age are exempted from income tax up to 3 lakh limit instead of 250000. Very senior citizens – who are aged above 80 years – are exempted from income tax up to 5 lakh so they need to pay income tax on income above 5 lakh at the rate prescribed for people in the general category.

The education cess and additional surcharge – known as Secondary and Higher Education Cess – on income tax for the year 2015- 16 are going to be at 2% and 1% respectively. These charges would be levied from all tax payers. HUFs, artificial juridical persons, AOPs, co-operative societies and firms whose income exceed 1 crore are liable to pay 12% surcharge on their income tax amount.

Let us now look at the tax deductions offered in this budget.

  • Section 80C limit is untouched and kept at Rs.150000 limit. However, section 80CCD limit is hiked from Rs. 1 lakh to Rs. 150000 for new pension scheme.
  • There is a considerable change in section 80D on health insurance premium limit. Under section 80D, deduction up to Rs. 25000 is allowed for general category people and Rs. 30000 for senior citizens. The existing rates for general category people and senior citizen people are Rs. 15000 and Rs. 20000 respectively. In case of very senior citizen people no exemption is allowed as of now but they are eligible for a deduction of Rs. 30000 towards medical expense.
  • PAN number is a must for any transaction above Rs 1 Lakh.Union General Budget 2015-16 : Income Tax Rates
  • Sukanya Samridhi Account Deposit Scheme becomes more attractive investments than PPF now as all interest earned from this scheme and maturity amount are exempted from tax. So the investments made under this scheme fall under exempt- exempt – exempt tax category.
  • Income deduction on account of interest on home loan is up to Rs. 2 lakh. Transport allowance exemption limit is hiked in the current budget from its existing limit of Rs. 800/month to Rs. 1600/month.
  • Big hike on service tax rate. It is hiked from existing 12.36% to 14%. This hike is definitely going to effect business of all service sector companies. Wealth tax is replaced by 2% additional surcharge on taxable income above 1 crore rupees. Senior citizens are eligible for service tax exemption on Varishta Bima Yojana scheme.
  • 100% tax deduction on the amount contributed towards Swachh Bharath and clean Ganga activities. Under Section 80U, differently abled people can get deduction up to Rs. 75000. The existing limit under this Section is Rs. 50000. In case of severe disability, the limit remains same at Rs. 1 lakh but it is proposed to hike the limit to Rs. 125000/-


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How Much Money That You Need To Invest?

How Much Money That You Need To Invest?

Many of us may make some investments in ELSS (Equity Linked Saving Scheme) for saving tax this year. ELSS is a good investment, but do you have any idea how much amount that one need to invest to get the maximum advantage?

You need to decide whether to invest the maximum amount so that you get the full tax benefits this year. Many people just do that  for the sake of saving some tax amount and they forget about the risks  associated with the equity-exposed investments such as Unit linked insurance plans (ULIP) and Equity linked saving schemes (ELSS). Yes, every investor should have sufficient amount of money exposed to few good performing equity linked investments to gain decent profit but that does not mean that we should invest all our savings in equity products. Then the next question is: how much money one should  invest in equity savings and for how long?

How Much Money That You Need To Invest?

Actually, it is not advisable to expose the whole savings to equity exposed investments. One need to keep a portion of it to meet future contingencies due to job loss or any medical issues for self and family members. The amount one need to keep aside to meet these contingency risk factors may vary depending upon his/ her socioeconomic status.Your entire family may be covered under life insurance and health insurance but you still need to keep this contingency fund aside just to be on safer side.

Invest only a part of investible surplus and not all your savings. Investible surplus is the amount that you have after all your regular expenses – that include your family and personal expenses – are met. It is about deducting your 3-4 months average expenditures plus around 10% of annual savings. Let us make it clear with a simple example.

Consider your total annual savings are 400000 INR and your average monthly expenditures and contingency expenses are about 30000 rupees and 45000 rupees respectively.

Then your investible surplus would be around: 235000-265000 INR

400000-((30000*3) +45000) OR 400000-((30000*4) +45000))

If you know your regular investments, then it is easy to calculate your investible surplus by using the method mentioned above. This is an amount that we can ideally invest. However, it is still not advisable to go ahead and invest the whole money in ELSS or any other equity linked investments. Many people cannot afford to do so because products like ELSS or ULIP cannot be liquidated in first few years of its inception and it is subject to high market risk.

How Much Money That You Need To Invest?In such situation, how to go about it? Just ask yourself, can you take that much risk? Many people cannot take such risk with their hard-earned money, especially if they are above 40 years and having too many financial commitments to self and family.

In such cases people would prefer investments in low risk asset classes even though such investment plans earns comparatively less return  than  high risk equity investments. The ideal solution would be to spread the whole investments into different asset classes. This way we can share the risk associated with the investments in equity products. Now, the question is how much percentage of your investments that we should expose to equity market every year?

There is a general thumb rule that shows the maximum percentage of investible surplus amount that one has to expose to equity products at any point of time in a year. There is no hard and fast rule that you should stick exactly to that rule but, ideally keep somewhere close to that. When you follow this rule, you will get better control on your portfolio and investment pattern. This will help you know where do you stand on the way to achieve your investment goal. This figure is calculated based on the age of an individual, so it is an approximate figure but the most ideal equity exposure of an individual can only be arrived through proper personal financial planning process with the help of a certified financial planner.

So What is this thumb rule? It is very simple to understand.

Minus your age from 100 and takes that much percentage of your investible surplus (Not full savings) of that year as the amount that we can invest in any tax saving equity-linked investment plan for that year.

Let us make it clear with the same example mentioned earlier. Here, our investible surplus amount is 235000 to 265000 INR. Let us assume your age is 30. That means you can expose up to 70% (100-30) of your investible surplus to any equity linked investments this year.

How Much Money That You Need To Invest?Now, if we take 70% of 235000 or 265000 INR (We can choose either one of these figure depending on  our personal preferences and risk appetite) we get the actual amount that we can ideally invest in this year. It comes to Rs.164500 to 185500.

Remember, this amount is subjected to change every year as you get older. This ratio varry based on investible surplus amount that we would have in the coming years. We need to adjust this level in each year and maintain the ratio between equity based investments to the other investment components. Maintain the percentage based on the age, overall portfolio value and the amount that you want to invest in each year.

We understand how much money that we need to invest in equity market every year.  Now, you may want to know how long one should invest in these equity linked instruments? Every ELSS has a minimum locking period of 3 years. Investors are free to exit this fund if they are happy with the return they earned after this locking period. In case the investors want to gain more return then they can wait for few more months or years for the fund to appreciate. 

How Much Money That You Need To Invest?Which are the top ELSS funds that we should prefer?

Almost all Asset Management Companies in India has an ELSS scheme. Investors need to go through the fact sheets of each mutual fund and analyze the previous years performances. Investors can make a decision based on this analysis. I primarily prefer some of the selected ELSS schemes to invest. Here are some of my favorite ELSS funds:

1. Franklin Templeton: Franklin Templeton Tax Shield

This is an open end equity linked savings scheme (ELSS) with an allocation of minimum 80% to equities to enable growth over the long term. Since this fund invest mostly in large cap blue chip companies, the investment made in this fund is subject to less volatile than mid cap funds. I highly recommend this fund in all market scenarios. 

2. SBI MF : SBI Magnum Taxgain Scheme: This is a very old fund but it has consistently performed at regular intervals in the past. You might not see this fund holding the top performer’s slot quite often but it will definitely give a decent return over 4-5 years of term.

3. TATA MF: TATA Tax Saving Fund is managed by the Fund manger, Pradeep Gokhale. One can invest Rs.500 or multiples of 500 in this scheme. This fund invest 80% to 100% in Equity & related instruments. The remaining part of this fund is allocated to listed and unlisted debt instruments. Since this fund is highly exposed to equity market, it is classified under high risk investment fund.

Although there are many top performing ELSS schemes in the market right now, I am always in favor of these three funds because they are always shown stable growth over a period of 4-5 years. Investors can expect a decent growth from these ELSS funds. Always refer Mutual fund’s monthly fact sheet before making an investment in any mutual funds.

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