How will this Budget impact your financial plans?

Disclaimer: This story is for informational purposes only and should not be taken as investment advice.'
 

A Union Budget can impact your personal finance plan in various ways. Budget influences interest rates, inflation and price levels. Measures taken in the Budget can make some of the financial instruments relatively more attractive while making others costlier. Here are 6 major changes in your personal finance plans that a Motilal Oswal report predicts after the Budget:

Government may reduce GST on financial services

An 18 % GST on financial products makes many products quite expensive. Term plans of insurance, brokerage costs, fund management costs, portfolio management charges, DP charges attract 18 % GST. A reduction in rates on financial products has been a demand from the markets for quite some time now.

For traders, the higher GST combined with securities transaction tax (STT) changes the entire economics of trading. Most individuals look at term plans for their low-cost and insurance focus.

By making them pay 18 % GST on term plans, it is actually reducing the advantage that these term policies enjoy. It is expected that the government may reduce the GST on all financial services to the 12 % bracket so that higher costs do not passed on to the policyholders. This could either happen in the Budget or even before that, but the government has reiterated its commitment to help investors create wealth over the long term through investing.

A shift in fiscal policy will mean no more rate cuts

The government is likely to use this Budget to signal a shift in its policy focus from monetary policy to fiscal policy. That is an indirect indication that it may be the end of the road for further rate cuts at least in the immediate future. With the US likely to hike rates by 100 bps in 2018 and the RBI having already cut bank rates by 275 basis points in the last 3 years, the room for manoeuvre is very limited for the RBI. 

The government may give an indication of the shift to fiscal policy in this Budget and that will mean lower returns on debt instruments. Investors in debt instruments may have to factor this in, especially if your exposure is largely to long-dated government bonds. If one looks at the CPI inflation rate over the last 1 year, the inflation rate has gone up consistently from 1.54 % in June 2017 to 5.21 % in December 2017.

With the government likely to increase the liquidity with the people, the pressure of demand pull inflation is going to be high. Additionally, oil prices are not showing any signs of retreating and that is evident in the oil prices in India. All this is likely to keep inflation levels elevated through the year. Therefore, if you have just made your plan and projected future outlays, it is time to revisit and perhaps increase the inflation assumption.

This will give you a clearer picture of higher allocations you need to make or higher risk you need to take.

Brace yourself for higher returns on hard currency assets

Many of us hold some foreign currency assets in our portfolio. Year 2018 could be a year when the rupee could remain under pressure. We have seen the trade deficit for the month of December shooting up sharply to $15 billion. With Indian crude imports at all time highs to cater to higher refining demand, the Indian rupee may remain under pressure.

This may be time to shift a part of your portfolio that is either denominated in foreign currency assets or those assets that benefit from a stronger dollar versus the Indian rupees. At least allocate 10 % to such dollar defensives.

Some of the tax benefits may be skewed towards equities and risk assets

The government has been consistently trying to get more investors into wealth creating equities. With a sharp cut in interest rates in the past 3 years, there has already been a big shift in retail money into equities as is evident from flows into equity funds.

This Budget may either expand the limit for Equity Linked Savings Scheme (ELSS) funds or may also include select equity shares under the ELSS classification. Of course, this will come with the 3 year lock-in period. Alternatively, we also foresee a possibility where the Section 54 EC benefits for reinvestment of capital gains may also be extended to equities and equity mutual funds.

Be prepared for less returns and more taxes on your small savings 

This is a reality that most investors will have to contend with and adjust their personal finance plans accordingly. For example, we have already seen rate cuts in PPF and RBI bonds. Many more instruments could the follow suit.

Also the Direct Tax Code (DTC) is being finalised and one of the key provisions will be shifting most of the small savings from EEE to EET. That means while the investment and the returns will still be tax free, the redemption will be taxable. That will also change the economics of most small savings instruments. You need to factor it into your financial plan.

Interestingly, Budget 2018 will be critical to your financial plan in a variety of ways. One will have to reassess their financial plan according to the trends After the Budget.