Budget 2015: PenguWIN’s Point of View on Specific Aspects

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Dear Friends,

                   I am sure you would have watched, read and heard enough about Budget 2015 as presented by our Finance Minister and my objective is not to discuss on all the points which by itself needs to be a series of blogs and can’t be achieved in just a 2 pager. There are enough summary or highlights documents that are already published and circulating in the web and hence my aim is not to summarize or provide the highlights once again.

The intent of this blog is to pick a few areas specific to outlook for Equity Markets in the long run and also areas that impact the salaried class. The budget has been touted as a “Super Budget” in the same league as Dr. Manmohan Singh’s 1991 budget and Chidambaram’s 1997 budget, for economic growth of the country and corporate India has given a huge thumbs up for the same.

The Road Map for Fiscal policy over the next few years, simplification of corporate tax structure, limiting the SOPs, GST Implementation by 2016, curtailing the black money transactions, deferring of GAAR and clarifications on retrospective taxation are positive signals for growth of Equity Markets. Dr. Rajan, RBI Governor seem to have viewed the Budget positively and has done his bit by announcing another surprising out of the turn Rate cut of 25 basis points on the 4th Mar 2015 that resulted in the Sensex breaching the psychological figure of 30,000/-, though was short-lived.

The question that several investors have in their minds is where will the Equity markets head from the current levels and what will be the returns that we can expect?

On 5th Mar 2015 as I am writing this blog, I am sticking my neck out and predicting returns of 15% CAGR until 2020, from today, at a conservative level (I don’t want to call out the upside as anything more than that is a bonus). In simple terms, this means that money invested today in diversified equity MFs will easily double by March 2020.

This is based on my reading of the market situation and the inputs that I have gathered from different sources. Please remember that Markets have already run up quite a bit in the last year or so while corporate earnings are still yet to catch up.

Now, getting into specifics of budgetary proposals:

I should say that I was thoroughly disappointed as why the Finance minister failed to increase the Direct Tax exemption and give more to the tax paying class. When corporate India hails the budget to such an extent, I fail to understand why the exemption limit could not have been raised to atleast 3 Lakhs for Normal Citizens and say 3.5 Lakhs or 4 Lakhs for Senior Citizens. This would have been viewed very positively by the salaried class and the FM would have garnered applause from all sections of the people rather than just the elitists. Infact it was the same Mr. Jaitley, who, as the leader of the opposition, on 20th April 2014, demanded increase in exemption limit to 5 lakhs. Honestly, I could not figure out the exact numbers of the revenue impact for the government if the tax exemption had been increased to 3L but felt it should have been done to appease the middle class and the revenues foregone could have been made up elsewhere. Several people whom I spoke to felt that they have been let down by the FM on this point and I see this an opportunity lost for the goodwill of the government.

New Pension Scheme, NPS has been given as additional exemption limit of 50,000/- in the budget. However, since NPS does not enjoy EEE status and compulsory annuity (40% of the corpus) needs to be purchased at the time of retirement, I am not a big fan of NPS. I did a small calculation of NPS Vs investments in diversified equity funds over a 20 year period which I have given below. I have assumed that the Equity MF investor is paying taxes and only investing the balance. NPS has a cap of 50% in Index based Equity Funds and the max that I can think of as returns from NPS is about 12% in the long term. The calculation shown below is exclusive of the tax benefits of Equity MFs and unless NPS is given EEE status, I don’t see it as anywhere close to competition for Equity MF investments with respect to building long term wealth. Added to this is the poor service level that an NPS investor gets and 3 of the NPS providers that I have dealt with gave me a feeling that they are doing charity by servicing an NPS investor. For the record, I would like to mention that it’s been 8 months since I moved from corporate sector and I am still struggling to move my NPS from corporate to self-contribution mode. The service levels of NPS definitely needs to improve.

  NPS Equity MF
Income / Tax Bracket NA >5L or 20.6% >10L or 30.9%
No of Years 20 20 20
Monthly Contribution 10000 7940 6910
ROI 12% 16% 16%
Final Corpus ₹ 98,92,554 ₹ 137,07,947 ₹ 119,29,712
Returns over NPS NA ₹ 38,15,393 ₹ 20,37,158

Lastly, I would like to commend the government for bringing in the Sukanya Samriddhi Scheme for the benefit of girl children and the budget giving EEE status for the same. With a 9.1% interest rate, which is 0.4% higher than that of the PF, it is definitely a very attractive proposition though the age limit of 10 is a dampener for me personally (as my daughter is over 11 and she can’t be a beneficiary). I have always been an advocate for PPF and a combination of PPF and MF investments will be a perfect solution for majority of investors from a long term wealth creation perspective. With the launch of Sukanya Samriddhi scheme, I propose to add this to my recommendation for the investors.

Please feel free to write to me or call me if you have any questions or suggestions.

 <Blog # PenguWIN 1026 – Budget 2015: PenguWIN’s PoV> 

3 comments on “Budget 2015: PenguWIN’s Point of View on Specific Aspects

  1. Dear Sir,

    Thank you for sharing the reflection on Budget 2015 to the benefit of the Investor and blog readers.

    Regards,

    S.R.Loganathan

  2. Sendhil,
    Thanks for the blog and your views.
    Two questions on NPS (which I couldnot figure out form NPS documentation jargons), does NPS tax exemption limit beyond 80C? And is there a minimum age of retirement? What qualifies as retirement?
    Regards.

    • Hi Sibendu,
      The additional deduction of 50,000/- announced in this year Budget for FY 2015-16 (AY 2016-17) comes under section 80DD(1B) and will be over and above the 1.5 Lakhs given as exemption under 80C. But NPS does not get the EEE tax treatment like PPF’s and during Retirement a minimum of 40% of Corpus needs to be used to purchase an Annuity plan, which in my opinion reduces the steam of NPS.

      The retirement age defined by NPS is 60 years and if you plan to retire before 60 and decide to use the NPS corpus, then you need to purchase an Annuity plan for 80% of the corpus. Annuity payments received will be considered as taxable income similar to pensions received by retired Government employees.

      Hope this clarifies.

      Sendhil

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