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Save More This Budget!
July 9, 2009

All eyes were set on Mr Pranab Mukherjee as the Finance Minister arrived to present the budget for the year 2009-10. Expectations have been high ever since the Congress-led United Progressive Alliance won a thumping majority in general elections. We analyse here how this year's budget will benefit the common man's financial planning.

Author : Dhanashri Rane

Untitled Document

This year, spend a little, save more and invest a lot!

Given the budget’s tax-related announcements, let us see how much we can save assuming maximum tax paid within each of the individual tax brackets:

Table 1: How the personal tax changes will affect each band of income?

Type of individual

All except women, senior citizens


Senior Citizen

Income Level

Tax Amount


Tax Amount


Tax Amount







































Highlights of the budget related to tax incidence on individuals are as follows -

  • For all categories of tax payers, the limit for your tax exemption has been upped by Rs. 10,000. So you need not pay any tax till an income level of Rs. 160,000. Senior citizens have an extra breather of Rs. 15,000 which means that have no tax outgo up to an income of Rs. 240,000.  Women tax payers are free from paying taxes up to an income of Rs. 190,000.

  • Another goodie in the budget bag is the removal of 10% surcharge on personal income tax and the gradual ouster of surcharge on various direct taxes.

  • Tax deduction on the treatment of a dependent with severe disability is definitely, a welcome step in the wake of spiraling medical costs. Under section 80-DD, the threshold has gone up to Rs. 100,000 from Rs. 75,000 earlier.

  • Individuals, Hindu Undivided Families and companies having net wealth worth Rs. 15, 00,000 had to pay a wealth tax of 1%. The wealth tax bracket has been extended to Rs. 30, 00,000, effective from 1 April 2010. 

  • Building an effective social security system is a necessity for every country. To attract and boost up the voluntary contribution to the new pension scheme (NPS), the government has proposed tax exemption to the NPS trust from income tax, dividend distribution tax and securities transaction tax.  Thus, the income of the trust, dividend paid to trust and purchase/ sale of shares is immune to taxes.

  • In addition, tax reforms, though in a staggered manner, are expected to bring in more efficiency in the system. The Direct Taxes Code specifying structural changes in tax system will be released for public discussion in next 45 days. The introduction of Goods and Services Tax, the simplification of the income tax return form “SARAL II”, and setting up of central processing centre is to ensure a standardised, user-friendly and simple tax collection process. The implementation date for GST has been set at 1st April 2010. This tax is expected to replace Service Tax, Central Sales Tax, Local Sales Tax and similar levies. The intent is to move towards single tax regime and reduce multiple taxation.

  • Apart from these, the Fringe Benefit Tax imposed on employers for the perks provided to employees has been removed. As per the Finance Bill 2009, the tax may be passed on to the employees for yearly contribution to superannuation fund in excess of Rs. 100,000 and employee stock option plans.



Mr Mukherjee started his budget speech by saying that, “A single Day cannot solve all the problems and I don’t intend to do so today”. The finance minister had a tough task before him of maintaining the growth target and managing the fiscal deficit. Despite this, Mr Mukherjee has certainly given relief to the common man through tax reforms. Previously, giving more leeway and extending the base of tax-payers has enabled the government get more revenues. The share of direct taxes in the government revenue increased to 56% in financial year 2008-09.

If we closely examine the numbers in Table 1, it is clear that the highest beneficiary of the revised tax slabs is the higher income group. The surplus money available to the upper end of the income group will eventually be directed towards higher amount of spending, savings or investing. The major driver of the India’s growth story has been the consumption-led demand. The revision in the tax rates can be said to be a measure to continue the domestic demand for products and services.

However, the improvements are still far off from individual concessions offered in developed countries where tax credits are given if you are single/ widowed parent, have a spouse/child with disability or have a dependent relative.

The incidence of tax influences the economic behaviour of individuals. The decisions related to investment and consumption depends upon the tax incentives. Traditionally, we have been a country of savers. The National Council of Applied Economic Research - Max New York Life conducted a survey of 60,000 households in 2005. The key finding of the survey was that although people save for contingencies and long-term goals like children’s education or marriage, they do not invest in long-term instruments. Also, the inclination to save is prevalent across all income groups. Almost 65% of people preferred to save money in banks or postal deposits or simply as cash at home, 23% parked in property and gold and only a marginal 12% took an exposure to financial securities. Presently, we have instruments like equity linked savings schemes of mutual funds or life insurance policies having lock-in period of 3 years or savings scheme deposits fixed for 7-8 years. Informal ways to save may not be adequate to cover personal finance requirements of all income groups. Hence, the tax incentives should be directed towards encouraging long-term investments and promoting an individual’s life-cycle needs.

Nevertheless, the reforms are a positive step towards inclusive growth by creating more demand and generating higher revenue for the government. Going ahead, a futuristic approach to the tax reforms is required in order to create a more equitable system.

iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


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