Demystifying Budget 2018

Demystifying Budget 2018

Budget 2018 was on the expected lines of the Pre-Budget note released by ORO Wealth. As envisaged, the Budget has a strong focus on agriculture, rural development, MSMEs and Affordable housing. The Government reaffirms its stance on Sabka Saath, Sabka Vikas, by focusing on agriculture and related activities, rural development, ease of doing business for SMEs/MSMEs. The budget had nothing to cheer for salaried class and corporate India. For investor community, re-introduction of long term capital gain tax was a major change. The Government has revised the fiscal deficit target for FY18 to 3.5% (earlier budgeted was 3.2%), for FY19 it is estimated at 3.3%. However, the government is committed to fiscal discipline by targeting 3% fiscal deficit from FY19 onwards.

On the Personal Finances front, following are the important changes:
·         Long term capital gain tax of 10% is applicable on gains which exceed more than INR 1 lac on all equity and equity mutual funds. However for the purpose of calculating gains, the cost price to be taken is higher of purchase price or price as on 31-Jan-2018.
We recommend to redeem all your long term mutual fund schemes which are under Regular (commission) plans and purchase Direct plans before 31-Mar-2018. This will lead to tax savings on units sold and also better returns by investing in Direct plans

·         Equity-oriented mutual funds are liable to deduct 10% on distributed income
This brings parity between Growth scheme and Dividend schemes of equity mutual funds. However, the benefit of exemption limit of INR 1 lac is not available for dividend schemes for computing long term capital gains. Thus we recommend to switch your long term schemes under dividend option of equity mutual funds to growth option

·         Time-limit to get exemption from capital gains on sale of land and building has been extended to 5 years from 3 years

·         Education cess has been increased to 4% from 3%

·    Standard deduction of INR 40,000 allowed to salaried class in lieu of transportation and medical allowances

·         The limit of deduction for medical premium has been increased to INR 50,000 from INR 30,000

Coporate Taxation
·         Corporate reduced to 25% for entities having a turnover of less than INR 250 crs

Below are the key highlights and impact on various sectors:

Big Positive
·      Strong emphasis to double farmers income by 2020
·      Raising kharif MSPs to 1.5x of costs
·      Creation of Agri-Market Infrastructure Fund of INR 2,000 crs
·      Doubling of allocation to Food processing sector to INR 1,400 crs
·      Development of Fisheries and Animal Husbandry with an allocation of INR 10,000 crs
Big Positive
·      Allocation for infrastructure development of INR 5.97 lac crs (up 21% YoY)
·      Allocation for railways of INR 1.46 lac crs (up 20% YoY)
·      Allocation for roads of INR 1.21 lac crs (up 10% YoY)
·      99 cities selected under Smart City scheme
·      Plan to create 3.17 lac km roads of rural roads, 51 lac houses and issue of 1.75 cr new electricity connections in rural areas
Affordable Housing
Big Positive
·      Allocation towards affordable housing of INR 64,500 crs (up 120% YoY)
·      Dedicated Affordable housing fund under Pradhan Mantri Awas Yojana
·      Credit linked subsidy scheme allocation increased to INR 1,900 crs from INR 1,000 crs
Insurance Sector
Big Positive
·      National Health Protection scheme to cover 10 crs families (approx. 50 cr people) providing health insurance upto INR 5 lac p.a. per family for secondary and tertiary care hospitalization
Banking and Financial Services
· Relief from MAT for companies under Insolvency and Bankruptcy code. They buyer can now adjust carry forwarded losses and unabsorbed depreciation from book profits. This should improve NPA recovery
·      Regional Rural Banks can raise capital from equity markets
Consumer / Retail
·      Boost to rural demand on account of focus on agricultural development
·      Increase in import duties to benefit domestic manufacturers

Equity Market Outlook
The long term capital gain tax really spooked the market which has led to knee-jerk reaction. However the long term growth story of India is still positive. The reforms which are implemented over the past several years will lead to a robust growth over the coming years. India is one of best performing equity markets in 2017 and thus should attract investors interest on account of changing fundamentals, better macro-economic indicators, reform-oriented agenda and rising investor participation

Debt Market Outlook

2017 was a roller-coaster ride for bond yields. Excess liquidity, rising inflation and fiscal slippages kept investors guessing regarding the future trajectory. Currently, with an increase in fiscal deficit target, upside risk to inflation on account of higher MSPs, neutral stance of RBI, tightening of policies by central banks across developed nations, we recommend to reduce the exposure from long duration funds
Created by
Madhusudhanan Raghunathan
  • NK
    Posted at 12:09h, 05 February Reply

    What is the basis for your recommendation for liquidating long term mutual fund schemes which are under Regular (commission) plans before 31st March 2018?


  • Vaibhav Shah
    Posted at 13:43h, 06 February Reply

    Hello Sir,

    If the schemes are long term, then you can save the ongoing commissions by switching to Direct. If the same is done post 31st March, 2018, all the gains which accrue between 31st Jan to till the time the fund is redeemed, will be liable to tax.

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