The Budget

How important is a Budget?. Definitely a person who's Net worth grows on time will know how important is a budget. It is very important to understand each and every move of our government. Though it is not realistically possible to track all the moves of our government, we could possible concentrate on those which might benefit us and our family. Many people may like the current government and many may not, but it is very important to make use of the options available. To understand this, it is very important to know what budget says.

The total expense estimated on our last budget (2020 - 2021) was Rs.34,83,236 Crores. Out of which, the major allocations is for Defense (as usual), this is around Rs.4,78,196 Crores. Followed by the Ministry of Consumer Affairs, Food and Public Distribution which is around Rs.2,56,948 Crores and so on. We should also note, our government has planned to spend Rs.1,31,531 Crores on Agriculture and Farmer's welfare. Combining these two, our government has planned to spend Rs.3,88,479 Crores on Food and Food making business. This is the next highest to the budget estimate for defense.

Now, it was very evident that our government planned to invest or spend more on Food and Food making business. In March 2021, the union cabinet approved for PLI (Production Linked Incentive) Scheme for food processing sector, entailing an outlay of Rs.10,900 Crores. This scheme was estimated to create 2.5 Lakhs jobs as per government. Why not we concentrate on these businesses or invest on these business who would get the benefits from the government to make more profits.

Most of the working class professional will look forward for the exemptions given on the tax slab. Though it will help few percentage of the working class to get exemption. Most of the working class in cities and many of the rural population will fall on the higher tax slabs and will end up in paying higher taxes. There are many ways to reduce the tax payment. The primary and foremost of those would be investment planning like FD for 5 years and paying interest on medical / health insurance and home loans. 

Apart from tax slabs, there are few things to concentrate on the budget regards to taxes on stock investment. If we are holding shares more than 1 year, then the profit / gains arising out of such shares will be considered as a long term capital gains. If we are holding shares less than 1 month, then the profit or gain arising from those are considered as short term capital gains. Tax on long term capital gains are paid at 10% (only for the gains exceeding Rs.1,00,000) and the tax on short term capital gains are paid at 15%. 

So, the point is when we hold the share for long term, we straight away reduce the 5% tax paid, Rs.1,00,000 straight exemption from the gain and the excess of transactional fees paid to the brokers and exchanges when we perform short term investments. It is also important to note, we pay the long term capital gain tax only when we sell the equity shares which we hold. Till we hold the share, we don't need to pay tax except the dividend tax if applicable.

Taxes on dividend are applicable at 10% (If the dividend income exceeds Rs.5,000). For example, if we hold 1000 shares of a company and the company declares Rs.20 per share as a dividend. Then we are entitled for a dividend of Rs.20,000. This is more than Rs.5,000. So, the TDS of 10% (Rs.2,000 for Rs.20,000) is deducted and the remaining Rs.18,000 will be credited to the bank account. These are few important announcements which we can hear from the budget. 

As a long term investor to generate wealth, one should focus on how tax can be reduced and invested on other revenue generation medium. Focusing and understanding the budget on taxes will help to achieve this. I believe the reader of this blog get the idea on importance of reducing the tax and increase the investment span for wealth generation.

Have a Great Day

B G Nareshkumar