Budget 2018 - Impact

This budget brings in key changes to equity investors & senior citizens. Salient points are presented below for quick reference. Only when the budget is blessed by both houses of the parliament, the effective date(s) of these changes will become firm. An across the board change in direct tax is revision of Education cess as "Education & Health Cess" from 3% to 4%.

Investors

1. Re-introduction of long term capital gains (LTCG) tax on equity shares and equity/equity-oriented mutual funds @ 10%. It covers Arbitrage funds, Balanced funds & Tax-saving ELSS funds as well.
2. For shares, long term capital gains in excess of Rs.1 Lac from Jan 31, 2018 would be taxed at 10%
3. Dividends on equity funds to be taxed at 10% as distribution tax - they are no longer free!
4. 54EC capital gains tax savings scheme is now restricted only to capital gains from land & building. The lock-in period is also extended from 3 to 5 years. If you made a long term capital gain in debt mutual funds, no tax saving is possible through 54EC!!

Changes Good/Bad?

• Bringing LTCG tax on equities and related instruments is a good measure to weed out speculators from the market. Long term investors with proper goal planning stand to benefit from less volatility.
• The effective tax rate would still be lower than 10% due to the Rs.1 Lac exemption.
• Taxing the dividends of Arbitrage & Balanced funds is also a welcome move, as this plugs the rampant mis-selling opportunities in the industry. 
• These changes also emphasize that growth option of the funds are the best suited for retail class of investors.
• Perhaps the only bad is disallowing 54EC for LTCG from mutual funds. This is a much needed practical & genuine use case - where an investor could incur a high LTCG tax if he/she wishes to re-balance his/her portfolio or exit poor quality / low performing funds in the middle of his/her investment horizon.

Senior Citizen Savers

1. Exemption of interest income u/s 80TTA raised from Rs.10,000 to Rs.50,000.
2. The ceiling for health insurance premium u/s 80D raised from Rs.30k to Rs.50k
3. Medical treatment for specified illness u/s 80DDB raised from Rs.60k to Rs.1 Lac
4. LIC's PM Vaya Vandana Yojana (8.3% for 10 years on annual annuity) scheme extended for investment till Mar-2020. The maximum investable amount is raised from Rs.7.5L to Rs.15Lacs on par with Post Office Senior Savings scheme.

Salaried class

• Instead of the present transport allowance of Rs.19,200 & medical expense reimbursement for employees, a standard deduction of Rs.40,000 given.

Summary
With the government focusing on moving savers from real estate assets to financial assets, it is reasonable for a retail investor to expect indexation benefit to be given on his/her long term capital gains from equity & debt mutual funds. Rest of the measures could help stabilize the equity market in the medium to long run. Watch out for more as the finance bill gets nailed!