What is Fiscal Cliff? how it will impact India

WHAT IS FISCAL CLIFF?

Post the economic crisis of 2008-09, the US economy has gone through the most difficult times in its age-old history. The economy had contracted drastically and the level of unemployment in the country had reached levels of the Great Depression of 1929. To save its economy, the US resorted to pumping huge sums of money into the economy (known as quantitative easing or QE) to revive the economic conditional as well as employment levels in the country. However, as a result of higher spending the US witnessed a quantum jump in its fiscal deficit. The US economy was already burdened by high fiscal deficit as a result of its spending over several social as well as other schemes, including financing of big wars outside the US in countries like Iran and Afghanistan.

The gap between spending and revenues was bridged through government borrowings As a result of higher borrowings, over the last several years its debt also kept on increasing from 55% of the GDP about two decades back to over 90% of the GDP recently.

WHY THE WORLD FEARS?

Many economists are of the opinion that if spending cuts and tax hikes contained in the Act come into effect, it will lead to a recession in the US and there would be a significant negative impact on employment levels in the US.

WHAT IT MEANS FOR INDIA?

The US economy is the largest economy in the world. Many countries including the emerging nations have close trade relations with the US. I believe that emerging countries like India have less dependence on the US in terms of exports as most nations over a period of time have diversified their exposures to other developed countries of the world. This could, however, mean that the pain would be less but it is surely going to impact India.To sum it up, we can say that all markets will react positively if the US reaches a deal and manages to avoid the fiscal cliff or als we would see another recession at the beginning of the year.

Tax Saving Exemptions: The simplest and easiest way to save taxes!

It is yet again that time of the year, when corporates start collecting the tax proofs from their employees. Like every other year, this year too many of us would have scurried and made submissions, in this hurry, one often misses to utilize the tax optimization benefit to the maximum extent.There are few items within your salary stack which enable you to save taxes without shelling out a single penny. These are termed as exemptions and tax free perquisites; here is an overview of the various exemptions/perquisites that one can claim.

Exemptions for Salaried Individuals

Exemptions can go a long way in enabling you to save ample taxes, often one misses to take adequate advantage of these. We take a quick trip across various exemptions that one can claim to reduce taxes significantly.

There was no monetary limit on LTA, the company would levy a limit. 2 trips in a block of 4 Yrs were allowed, for all income tax purposes one uses the FY ending 31^st March, for LTA one would use the Calendar year ending 31^st December. One needs to provide relevant proofs for the trip conducted, wherein route opted for should be the shortest distance and the destination has to be a single place.  Also, one needs to take leave from the company (min 2 days – may vary based on co., policy) for claiming this exemption.

Tax Free Perquisites

Company Car EMI arrangement – The EMI paid towards your Car will be directly reduced thereby reducing your tax liability. Food coupons, petrol / telephone re-imbursements are all items which will reduce your taxability.

Tax-efficient Investments

There are few investments which enable one to earn tax free returns, there are others wherein the returns are taxed, typically at normal rates or special rates depending on the type of instrument in which the investment was made. Returns from avenues such as PPF (public provident fund), ELSS (equity linked savings schemes), Insurance – Traditional / ULIP are tax free; on the other hand investment made in Fixed deposits, Pension plans, Infrastructure bonds are taxable. All the avenues mentioned above qualify for tax deduction. It is pertinent to choose tax efficient avenues and at the same time diversify even whilst planning for tax optimization.

Hope this brief helps you optimize your taxes effectively this time round!

Feel free to contact me for any query @ garvitdave87@gmail.com

Regards

Garvit