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Financial Planning

Investment Strategies Post Budget 2016

04 March 2016
Are there any particular avenues for investment you should explore following the announcements in the Budget 2016?
 

With the Budget 2016 over now, the common man is searching for the best investment options. Keeping this in mind, let’s look at some broad thematic areas where the Budget will have direct impact on your investments.

EPF, PPF, and NPS

The retirement savings that you were betting on will not entirely be available for retirement. The budget proposes that only 40% of the contributions made to Employees Provident Fund (EPF) will be tax free on withdrawal. The remaining 60% will be taxable, unless it is invested in a pension annuity scheme. The rationale behind this move is that the government wants to encourage citizens to invest in annuity products. So if your corpus is Rs 1 crore, you can withdraw 40 lakhs and use it for house construction or other work. The remaining Rs 60 lakhs you can invest in an annuity product so that you keep getting pension.

Related: 64% Indians fear not being able to achieve their retirement income target

At the same time, the National Pension scheme (NPS) will also have a tax-free component of 40%, bringing parity to the two schemes.  This means both NPS and EPF are now on an equal footing, as opposed to earlier where EPF was at an advantage. PPF contributions will continue to be exempted from tax and thus continue to remain a popular investment choice.

Dividend Income:

For those who like to invest in dividend-friendly stocks or mutual funds, the news is not so good. Budget 2016 introduces a 10% dividend distribution tax on dividend income of above 10 lacs. So investors who have high dividend paying stocks in their portfolio will now have to switch some of those funds into growth-oriented, low dividend yield stocks.

Related: How Budget 2016 Has Affected Your Take Home Salary

Investing in a new house:

There’s good news for first time home buyers! You can now avail an addition deduction of Rs. 50,000 while buying a new on interest for loan up to Rs 35 lakhs provided the house cost is below Rs. 50 lakhs.  So if you’re looking to invest in a home below 50 lakhs, you will get additional tax benefits. This makes affordable housing an attractive investment option.

Gems and Jewellery Sector:

Introduction of 1% excise duty on gold and diamond jewellery could lower their demand, although silver jewellery is exempted from the introduction of excise duty.  However, the Budget has proposed exempting capital gains tax on redemption of Sovereign Gold Bond Scheme 2015, which makes them a good investment choice. 

Related: How Will Budget 2016 Affect Your Personal Budget?

Corporate bond markets and new commodity products:

SEBI will now develop new derivatives product in the commodity market. E-auction platform will be introduced by SEBI for primary debt and a complete information repository for corporate bonds, jointly developed by SEBI and RBI.  If you are planning to invest in the bond markets, these measures will make investment easier for you.  However, a dampener in this is the increase in STT charges for options, which will reduce the benefits of gains made in options.

In a nutshell, with all the changes above, the government has two key messages for investors:

Move to contemporary forms of investing: The budget encourages investors to move from traditional tax saving investment options to more contemporary options such as new commodity and bond products. For example, small savings schemes no longer have the EEE status (tax-free status throughout the lifetime of the investment). Essentially, it means investors will now have to build their retirement corpus through other higher income offerings.

Reduce investment in physical gold: Budget 2016 intends to move investors away from investing in physical gold to gold based products. The additional tax benefits on gold-based products make them an attractive investment option. For example, the redemption of gold bonds being exempted from capital gains is meant to encourage investment in non-physical gold.

For a detailed look at the highlights of the Union Budget, here is a Comparative Analysis Of Budget 2015-16 And Budget 2016-17.

 
 
 

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