Long term financial wellness or more spending money

Budget 2020: Long term financial wellness or more money for spending

NPS is a very good and low-cost product for retirement planning

Representative image. (Credit: iStockPhoto)

The longest budget speech is finally over. Budget 2020 was about personal income taxes getting simplified. 

The good news for everybody is that the bank deposit insurance on fixed deposits held at scheduled commercial banks has been increased to Rs 5 lakhs per depositor, from the current Rs 1 lakh. Considering that this limit was set decades back, it is a welcome move.  

Taxing dividends at the hands of the investor and not the company or mutual fund is another good move for small investors. However, it is negative for those in tax brackets of 20% and above.

A new debt ETF is another positive development, as it allows individuals to earn tax-efficient income on their investments as compared to fixed deposits. Further, NRIs will be allowed to invest in certain government securities.

The biggest change in Budget 2020 has been the introduction of new tax brackets, which allow for lower taxation but without availing any deductions and allowances. If you decide to choose the new regime, you cannot avail of deductions on account of HRA, LTA, Sec 24 (interest on home loans), Sec 80C, Sec 80D (medical insurance premium) and many more. Further, once you choose the new regime, you cannot go back to the old regime in subsequent years too. 

The budget while trying to simplify, will turn out to be very confusing for most individuals. Not only does one need to decide which tax structure to follow, with employer contribution above Rs 7.5 lakhs in EPF+Superannuation+corporate NPS being taxed as a prerequisite, but the salaried may also have to rework their salary structure. 

The most disappointing part of the budget is that it disincentivizes savings.  It is well known that tax deductions are used as a nudge to get people to save for the long term and while the finance minister wants to drive consumption in the economy, it cannot be at the cost of long-term savings. India has seen household savings falling steadily and this does not bode well for individuals and the economy in the long term.

As an individual, here is what you need to do:

Assess whether you want to move to the new structure of taxation. Remember once, you move, you cannot come back to the old structure. I would recommend staying with the old structure.

If you are not sure about taxation and how to file your returns, please use the services of a chartered accountant. It costs between Rs 2,000-7,500 to have your returns made and filed. I am sure most of you can afford this.

Continue to have life and medical cover even if you move to the new structure. You may not have a deduction, but medical covers are essential for your financial wellbeing. Imagine not having a cover and your wealth getting significantly impacted by sudden large, medical expenses.

Start/continue investing in NPS. Similarly continue with investing in PPF, equity funds for your financial goals. 

If you haven’t drawn up a financial plan, engage with an advisor to create one so that you are aware as to how much and where to save, for your financial goals. 

While the government focuses on improving the ease of living for citizens, it is upon you to focus on your financial wellbeing. Financial wellbeing is having control over your day-to-day finances, having the ability to absorb financial shocks and being on track to meet your financial goals. 

Towards this, I would recommend moving on from the budget news and continuing with the old tax regime and focus on savings. 

Happy Investing!

(Mrin Agarwal is a financial educator, founder-director of Finsafe India Pvt. Ltd and co-founder of Womantra)