How the Budget affects an investor

Since neither income tax slabs not the tax rate has been changed, let's look at the impact of the Budget on you as an investor.

Shares

Securities Transaction Tax

The STT, which is a tax you pay when you buy or sell shares, is not new. It is levied on shares sold on or anytime after October 1, 2004.

Now, this tax is slated to rise. The finance minister has suggested an across the board 25% rise in the above figures. So, if the tax was 0.1%, 25% of 0.1% will now be added to it.

	Pre-Budget	Payable by	Post-Budget
Delivery based trades	0.1%	Buyer & seller	0.125%
Day trades	0.02%	Seller	0.025%
Derivatives	0.0133%	Seller	0.017%

Delivery based trading: When you buy shares to get them delivered to your demat account

Day trading: When you speculate by buying and selling shares during the day

Derivatives: Futures trading is an example of derivative trading

Dividends and capital gains

Dividends are tax free in the hands of the investor.

If you sell your shares within a year of buying them, you pay a tax of 10%. If you sell them after a year, no tax is levied.

The Budget has not changed this rule.

Mutual Funds

Securities Transaction Tax

If you sell the units of an equity-oriented mutual fund (fund that has more than 50% of its investments in shares), you pay a STT of 0.2% of the total amount.

In a few funds (around four) which are listed on the stock exchange, like the Morgan Stanley Growth Fund, you will have to pay this tax when you buy the units too. This is because they are treated just like stocks which are listed on the stock exchange.

What has changed?

Just like equity, this STT has increased by 25% to 0.25%.

Dividends and capital gains

Dividends are tax-free in the hands of investors.

For equity funds (and balanced funds that invest more than 50% of their total investment in equity), you pay no tax if you sell the units a year after buying them. But, if you sell your units within a year, you pay 10% short-term capital gains tax.

For debt funds (and balanced funds that invest more than 50% of their total investment in debt), you pay a tax whenever you sell. 

If you sell it within a year, the profit is added to your total income and you are taxed according to your income tax slab at the normal tax rates.

If you sell after a year, you pay either 20% with indexation or 10% without indexation. Indexation is the process by which inflation is taken into account to enable you to pay less tax.

What has changed?

Initially the income tax department defined an equity fund as one that had more than 50% of its total assets (investments and cash) in equity.

Now that has changed to 65%. So initially, balanced funds with more than 50% of their assets in equity could get the above benefit to equity funds. Not so any longer. Now, only if they have more than 65% of their assets in equity will they get the above benefit. If not, they will be treated as debt funds.

Also dividends from close ended funds will be tax free.   

• Want to invest in stocks abroad? The Budget has made it easier.

Section 80C

Certain investments that fall under this Section are eligible for an income deduction up to a limit of Rs 100,000.

Premium on life insurance policies

Contribution to Employee Provident Fund

Investment in Public Provident Fund

Investment in National Savings Certificate

Investment in infrastructure bonds

Investments made in Unit Linked Insurance Plans

Investments in Equity Linked Saving Schemes of mutual funds

Investments in notified pension funds set up by mutual funds

What has changed?

Fixed deposits in banks will now fall under Section 80C if they have a tenure of at least five years.

Also, the investments in pension funds are subject to a limit of Rs 10,000. Now this limit has been removed and they fall under the overall Section 80C limit of Rs 1,00,000.

• An alternative to NSC?

None of this is immediate!

Everything mentioned in the Budget may not get passed

All that the Finance Minister did on February 28 was to introduce the Budget in Parliament. Whatever is proposed in the Budget is just that: a proposal. It has not yet been passed into a law.

They take the form of a bill (which means they become a law) only after the Lok Sabha votes on the proposals and passes them. The Appropriation Bill (final demand for grants to be given to each ministry) and the Finance Bill (all taxation proposals) are then introduced in Parliament.

When passed they result in the Appropriation Act and the Finance Act. This is when the final Budget gets approved.

This means everything proposed in the Budget tomorrow may not get passed. Remember last year? The FM spoke about a 0.1% tax on withdrawal of cash of Rs 10,000 or more from banks or ATMs on a single day. It was never passed and was not implemented.

If passed, the tax proposals will be effective from the next financial year. The financial year is from April 1 to March 31.

That means, you have till the end of the month (March 31, 2006) to invest for the financial year April 1, 2005 to March 31, 2006. These Budget proposals do not hold sound for this time period. So the limit of Rs 10,000 on pension funds still holds and neither are five-year bank deposits included under Section 80C.

These proposals, if passed, are only applicable for the next financial year: April 1, 2006 to March 31, 2007.