After the Big B

Your financial planning may need an overhaul.

There are always a lot of expectations surrounding the Union Budget, but for individuals there is an additional challenge. A lot of the changes take effect from different dates and times. This calls for some preparation, so that the changes can be put into effect smoothly.

BUDGET CHANGES
There are three type of changes that are evident in a Union Budget, especially one presented in July, which is after a few months have passed in the financial year. Several changes in such a situation are retrospective, taking formal effect from the beginning of the financial year. This will mean going back in time for individuals in their effort to ensure a proper working. Other changes are implemented right away and this will, in most cases, come into effect from the next day. There are other changes that will come into effect only when the budget is passed and a particular date announced for implementation.

REWORKING THE YEAR
One major change often witnessed is in the rates and/or slabs of income tax. In case of change of slabs, these are done in either of the two ways. One is the change in the basic exemption limit, currently at Rs 150,000 for males below 65 years of age, Rs 180,000 for women below 65 years and Rs 225,000 for senior citizens. If this figure is changed, the entire tax working changes. The other way is that the income where a specific rate is present is also changed. For instance, the 10 per cent slab currently runs from Rs 1.5-3 lakh and could be changed to a higher level or some other slab, like the 10 per cent surcharge for net income above Rs 10 lakh could be changed. All these changes will be in effect for the financial year 2009-10 and hence would be valid from the beginning of April 2009.

In several cases the tax working and the proposed investment decision, especially for the salaried, has already been done in the first couple of months and this would require a revised working. For example, a change in the tax slabs with a higher benefit can result in a lower tax burden. In case of the salaried, who have to submit the declaration on their proposed investments, this will impact the tax that would have to be paid over the change. This would require a complete reworking of the entire figure for the year and a back calculation from the start of the financial year would be essential.

IMMEDIATE IMPACT
The budget is a time when several changes can take effect immediately. One area where this often happens is the small savings area. The situation here is usually similar to the one witnessed in case of indirect taxes like excise, which come into effect from midnight and hence there is an immediate impact. These rates are also usually changed from the next day. In case the rates actually go down, there are just a few hours left for the individual investor to ensure that they can take the benefit of the older high rates. If the same investment is done a day later, then the new rates will be applicable. If the rates actually rise, then it would be better to wait but where the expectation is of a fall, then immediate action might be required. This would include schemes like the National Savings Certificates (8 per cent), Post Office monthly income scheme (8 per cent, with 5 per cent bonus on maturity), Post Office time deposits (6.25-7.5 per cent) and so on. If adequate preparation is done, a quick reaction is possible for the investor, depending upon the nature of the change.

FUTURE IMPACT
There are also situations where adequate time is available and there is no need to rush things. A common example is the tax deduction at source that takes place in several areas like professional fees and other payments like interest, rent and so on.

If there is any change in the rate of tax deducted at source, then this change usually comes into effect at a future date, after the budget has been actually passed. In such a situation, the individual has to see when the change is actually occurring.

For example it could be that a specific TDS change comes into effect from August 16. The change in the entire calculation and other working would have to take place accordingly, so that there is clarity when it comes to dealing with the actual issue some time down the line. The main point here is that the changes will be effective only in the future and will not impact the situation till that specified date.

The author is a certified financial planner