NEW DELHI (TIP): Financial markets went in for the interim budget with little expectation, and rightly so, as finance minister P. Chidambaram was not expected to tinker with the existing tax laws. But he still had room to manoeuvre and propose changes that will have an impact on your money, well, for at least three months of the next financial year. The markets were looking for the government to contain its deficit under the budgeted target of 4.8% of the gross domestic product (GDP) for the year.

The government managed to restrict the fiscal deficit to 4.6% of the GDP, and now expects it to come down further to 4.1% in the next fiscal. Therefore, the two very important indicators—the fiscal deficit and the current account deficit which were worrying the financial markets and individuals alike—are now in a much better shape than a year ago, though the improvement under both the heads can be debated. Beyond this critical number of fiscal deficit, there was not much that markets were looking for.

As a result, the BSE S&P Sensex closed with a modest gain of 0.48%. However, there were some surprises for individuals. If you plan to buy a new car, there is good news as excise in this segment has been reduced, and so they are likely to be cheaper. There is also relief in store for those struggling with the burden of education loans, taken up to 31 March 2009. We take a close look at some of the proposals that will have an impact on your pocket.

Relief on student loans
The budget has extended the education loan subsidy scheme with some significant benefits. The finance minister has proposed a moratorium wherein you will not have to pay the interest on your education loan taken before 31 March 2009. The government will shoulder the burden of the outstanding interest portion as of 31 December 2013. From January 2014 onwards, you pay. Given that these loans were taken about four-and-a-half years back, borrowers are likely to have finished their education and moved on to jobs or are at least looking for one.

The difficult economic scenario in the country, with the GDP growth having fallen from 6.7% in FY09 to a budget estimate of 4.9% for FY14, jobs are not that easy to come by. Says A. Krishna Kumar, managing director and group executive (national banking), State Bank of India (SBI): “This is definitely a good move and will ease pressure on those who are still looking for jobs.” It is too early for banks to know exactly how much this liability is. SBI’s Kumar says, “We are yet to calculate the exact impact on our outstanding education loans.” The government has given an estimated benefit of around Rs.2,600 crore to about 900,000 borrowers. How does this work for you? We take an example using a calculator on Punjab National Bank’s website. Let’s assume, you took an education loan of Rs.10 lakh in April 2007 for a two-year course.

The interest rate was 12% per annum for 10 years with no processing fees. Your equated monthly instalment (EMI) per month was likely around Rs.14,350. Let’s say, you got a job after two years and started to repay the loan. But in December 2012, you lost your job and have not been able to pay the EMI since. In this case (assuming that the bank hasn’t invoked the guarantee or declared the loan as a bad debt), your outstanding EMIs for 12 months (as on December 2013) would be about Rs.1,72,200. Of this, the interest would be Rs.63,710. As the proposal suggests, the government will pay this outstanding interest on your behalf.

You will, however, have to start paying from January 2014. More details are awaited. Also, the relief is only for the outstanding interest and not the principal. Your final benefit will depend on the terms of the loan— when you took the loan, the interest rate, the period for which you haven’t paid, and others. It would be pre-emptive to say that this move will result in borrowers becoming complacent and the unpaid dues in this segment going up. Moreover, these loans are not a big portion of banking credit.

Cheaper wheels
Another piece of good news came by the way of the proposal to reduce the excise duty for the auto sector till 30 June. The excise duty has been reduced from 12% to 8% on motorcycles, scooters, small cars and commercial vehicles—such as Maruti Suzuki India Ltd’s Alto, Hyundai Motor India Ltd’s i10, Tata Motors Ltd’s Indica, Bajaj Auto Ltd’s Pulsar and TVS Motor Co. Ltd’s Wego.

For large and mid segment cars, the reduction is from 27% or 24% to 24% or 20%; and for sports utility vehicles (SUVs), from 30% to 24%. According to Prabhudas Lilladher Pvt. Ltd, the benefit is expected to be Rs.1,500-2,000 for two-wheelers and Rs.15,000-20,000 for small cars.

SUVs should be cheaper by Rs.48,000-60,000, but “given the current slowdown, the automakers may not be able to pass on the entire benefits for SUVs”, says Surjit Arora, research analystinstitutional equities, Prabhudas Lilladher. This may generate more demand and improve sales. Yaresh Kothari, research analyst-automobiles, Angel Broking Ltd, says, “It is a positive announcement for the sector. The cut in excise duty will be passed on to the consumer. Historically, they (auto manufacturers) have always done it. The benefit will differ based on the price of the vehicle.”

Says Suresh Sadagopan, a Mumbai-based financial planner: “It’s a one-time kind of savings possibility in the short term. If you plan to buy, try and cash in on this benefit before 30 June.” Consumer goods For the mobile handset segment, the finance minister announced that excise duty for all categories of handsets will now be 6% with central value-added tax (Cenvat) credit or 1% without it. Last year, the excise on mobile phones priced above Rs.2,000 had been raised to 6% from 1%, upsetting the industry as the cost of smartphones went up. The reduced excise, however, may not mean cheaper phones.

“This will not have any significant impact on prices as it will reduce costs marginally given the competition from Chinese manufacturers and the grey market,” says Hemant Joshi, partner, Deloitte Haskins and Sells. Cenvat credit essentially means that a manufacturer can set off excise or service tax paid on the input cost—for example, of raw materials— against its total excise liability. “This may give an edge to domestic manufactures as importers will continue to pay 6%,” says Bipin Sapra, tax partner, EY.

Two domestic phone manufacturers—Micromax and Karbonn—were the third and fourth largest mobile handset sellers in India with 10.1% and 9.1% market shares, respectively, at the end of the December-2013 quarter, according to International Data Corp. The leader is Samsung, followed by Nokia. The finance minister also proposed to reduce the excise duty on capital goods and consumer nondurables from 12% to 10% for items falling under chapters 84 and 85 of the Central Excise Tariff Act.

“What this means is that prices of some products such as basic machinery and electronic goods will be affected,” says Sapra. Prices of items such as washing machines, vacuum cleaners, computers, transistors, batteries, software, basic landline telephones, computer disks, knitting machines, etc., may go down if manufacturers choose to pass on the benefit. Super-rich surcharge The surcharge on the super-rich remains. Last year, a 10% surcharge was applied to those with taxable income above Rs.1 crore. This onetime move was supposed to be only for the assessment year 2014-2015, and was in addition to the education cess of 3%.

The surcharge and income tax rates will continue for the purpose of deduction of tax at source from salaries during the financial year 2014-15, and for computing the “advance tax” payable during that financial year on current incomes. “Practically, the income tax rates, including surcharge, will apply for tax withholding or payment of advance tax. Salaried individuals who pay taxes every month will have to pay this surcharge till the time the new government drops it.

But non-salaried individuals, who pay advance tax only in September, may not have to pay the additional surcharge at all if the new government drops it,” says Kuldip Kumar, executive director, PwC India. According to the Finance Bill, the total amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on a total income of Rs.1 crore by more than the amount of income that exceeds Rs.1 crore. Here’s an example.

The tax liability on a taxable income of Rs.1 crore is around Rs.29 lakh. So, if the income is even Rs.10 more than Rs.1 crore, the tax liability will go up by only Rs.10 and not Rs.2.9 lakh. Overall, while the finance minister managed to deliver on his promise of containing expenditure, the reduction in excise duty on various items and relief on education loans will also benefit a key constituent in elections—the middle class. The excise relief will lapse if the new government decides against it. Investors and consumers now have to wait till the new government presents its budget for the full year and give a fresh direction to economic policy and tax laws.