Not just sharp; it was a street-smart budget

Blog | OUTLOOK

The Interim Budget 2019 (if we may call it so) has sent a powerful message to the Indian people at large: that the government means business! For the first time, a full-fledged reformist and people-friendly colour has been given to the budget. Here are some of the key takeaways from the budget from a macroeconomic and capital markets standpoint.

Key takeaways from the Union Budget 2019

The budget—aimed at giving a big push to rural incomes—has tried to put money in the hands of the urban middle class. Here is how it will make a difference:

  •   This is the first budget that has explicitly given helicopter money to the people… beginning with marginal farmers. So, every marginal farmer owning less than two hectares of land will be entitled to Rs. 6,000 as annual minimum allowance. This will be paid in three parts during the year and will be disbursed directly to the bank accounts via the DBT scheme. This will ensure immediate relief and zero spillage. It is likely to be a big boost to the rural demand, with implications for demand for white goods, two wheelers, tractors, hybrid seeds, FMCG products etc.
  •   The big takeaway for urban India is that taxable income up to Rs.5 lakhs will now be tax-free. Of course, instead of giving an exemption, the budget will give this as a tax rebate of Rs.12,500 once the final tax is calculated. That is just one side of the story. Now, if you even earn Rs.10 lakhs, you can legitimately plan to pay zero tax. Here is how:
Particulars Amount
Total Income Rs.10,00,000
Exemption u/s 24 for interest on house property Rs.2,00,000
Exemption under Section 80C - Investments Rs.1,50,000
Additional benefit for NPS investments Rs.50,000
Exemption u/s 80D for health insurance (self and senior citizen parents) Rs.52,000
Net income after all exemptions Rs.5,48,000
Enhanced Standard Deduction Rs.50,000
Net Taxable Income Rs.4,98,000
Tax payable at 5% in excess of Rs. 2.50 lakhs Rs.12,400
Tax Rebate u/s 87 subject to maximum of Rs.12,500/- available Rs.12,400
Net Tax Payable Nil
  • What you can see in the above table is that even with a total income of Rs.10 lakhs, it is now possible to legitimately pay zero tax. In short, this is also an incentive for people in the lower- and middle-income groups, as they can now save and invest early.
  • The budget has also given special incentives for realty and home loan companies. For example, if you invest in a second home, then your notional rent will no longer be considered as taxable. Also, you can now sell your property and reinvest in two properties and still get tax exemption under Section 54 of the Income Tax Act. Realty companies can now hold inventory for up to two years without having to show any income on the inventory. All these are a big boost to realty and HFCs.
  • The only area of concern was the fiscal deficit at 3.4% for the current year and staying at 3.4% in the next year too. That reduces the incentive for the RBI to cut rates as the borrowing programme could put pressure on yields and make rate cuts, ineffective.

Overall, this budget will go down as a one that is sharp, well timed, and street smart. Both, the markets and the middle class surely have reasons to celebrate!