What is the Union Budget of India?
The Union Budget of a year is an annual financial statement. It is a record of estimates of receipts and expenditures that is to be made by the government in that particular year. It keeps a detailed account of the government’s finances for that particular fiscal year from 1st April to 31st march. The Union Budget is divided into two parts:
a) Revenue Budget
b) Capital Budget
Revenue Budget is the record of estimates of government revenue receipts and expenditures. Revenue receipts are of two kinds- tax and non-tax revenues. Revenue expenditures are incurred due to daily functioning of the government of India and the various public services offered to the citizens of the country. The government is said to have incurred a revenue deficit if the expenditure is higher than the receipts.
Capital Budget consists of capital receipts and payments made by the government. Loans from the public, from foreign governments and the RBI are considered as capital receipts. Capital expenditure on the other hand is the expenditure by the government on the development of machinery and infrastructure, health, education etc.
The government is said to be in fiscal deficit when the expenditure exceeds the receipts.
How and by whom is the Union Budget prepared by?
The Union Budget is prepared by careful coordination and through a calculative process between the Ministry of Finance and the other Union Ministries.
The Finance ministry issues guidelines and rules to instruct spending ministries. The ministries provide the finance ministry with estimates for receipts and expenditures for the past year, as well as the year for which the budget is being formulated. In this manner they plan and request for budget allocation.
The formulation of the budget is a very long process that has 4 steps:
The process starts in August/September with the issue of the budget circular that marks the beginning of a new budget cycle. It commences with the Finance Ministry asking for estimates of their expenditures from various ministries. It is followed by extensive discussions between the various union ministries and the Finance Ministry’s department of expenditure. The Department of Expenditure and Department of Revenue also meet with stakeholders such as farmers and small business owners in order to better understand requirements and to take their views.
Where is the Union Budget presented and by whom?
The Union Budget is presented in the Lok Sabha by the Finance Minister of India. Prior to the presentation, the President’s recommendation is obtained. After the President’s recommendation the Budget is laid in the Lok Sabha. The day that it is done is known as the Budget Speech Day. The budget is however not discussed in the Lok Sabha on the Speech Day itself. This year’s interim budget was presented by the Union Minister for Finance, Shri Piyush Goyal in the absence of the Finance Minister of India, Shri Arun Jaitley.
What were the key highlights of the Union Budget for FY 2019-2020?
While it would seem to most consumers that the ruling party would resort to populist changes in the budget this year in order to retain power, it seems as though the government decided to adopt a more passive approach towards such populist changes in the budget.
- The budget contains provisions that come as a relief for farmers and those employed in animal husbandry.
- A new scheme has been launched for farmers with land over 2 hectares, where in they get a fixed income.
- Individuals with annual income below 5 lakhs are now exempted from paying income tax.
- Standard deductions from salaries have been reintroduced and TDS thresholds have been changed.
- There has been an increase in allocation to various public welfare schemes, with addition of newer schemes.
- A new scheme for a fixed monthly pension for unorganised sector workers has also been introduced.
How does the Union Budget for FY 2019-2020 affect your personal finances?
Several changes have been made in this year’s budget that are set to affect people’s personal finances.
To start with the positives:
1. The EPF contributions for new women employees has been capped at 8% for the first 3 years at least after their joining. It serves to incentivize participation of women in the formal work force by enhancing the take home wage for the first few years at least. It also serves to positively impact retirement savings marginally.
2. Individuals with an annual income up to Rs. 5 lakhs are now exempted from paying Income Tax. Moreover, individuals with gross income up to Rs. 6.5 lakhs are not exempt from paying income tax if they make investments in provident funds, specified savings and insurance. This is set to incentivise people to save and invest a lot more. It also takes off a huge burden on people with incomes ranging between Rs. 5-7 lakhs.
3. There has been a proposal to increase the exemption of interest income on bank and post office FDs and RDs for senior citizens from Rs. 10,000 to Rs. 50,000. There will be no TDS on income earned from such sources. This will significantly increase senior citizens’ retirement savings and incentivize more investment and saving. Moreover, this move also implies that senior citizens will no longer have to fill out form 15H in order to prevent TDS on interest incomes.
4. Another move to increase the investment avenues for senior citizens is the proposal of extension of the Pradhan Mantri Vaya Vandana Yojana till March 2020, along with the increase in the limit of investment from Rs. 7.5 lakhs per senior citizen to Rs. 10 lakhs.
On the negative side:
1. Standard deduction has been reintroduced and will not benefit the salaried persons much. A fixed amount of Rs. 40,000 is deducted from the salaries in lieu of health and transport allowances for salaried personnel. This move could hamper those salaried individuals in the lowest tax bracket, what with the travel and health allowances also being removed. Those who stand to benefit most from this are non-salaried individuals and pensioners.
2. Transfer of equity shares above Rs. 1 lakh are now eligible to be taxed at the rate of 10% as a part of long term capital gains. Previously gains from sale of equity shares or mutual funds held for more than a year were not subject to taxation. This comes a rude shock to investors. It can also behavioural changes in market players and result in larger stock market volatility.
3. A proposal for introduction of dividend distribution tax on equity-oriented mutual funds has also been made. A DDT (dividend distribution tax) of 10% is proposed in order to maintain a level playing field across growth oriented and dividend distributing schemes. Investors in such mutual funds may have to seriously reconsider their positions and investment strategies as a DDT will reduce in-hand return to the investor. However, the dividend, if seen as a form of income, is non-taxable once it has reached the investor. Investors may have to invest far more carefully in MFs and use a systematic withdrawal plan.