Small change. That's what budget 2007 hands out to retail investors. Loath to slow down the gravy train, Finance Minister P. Chidambaram increased the personal income tax exemption limit by a token Rs 10,000 for men, women and senior citizens. As a result, male taxpayers can claim an exemption of Rs 1,10,000, women of Rs 1,45,000 and senior citizens, Rs 1,95,000. "The relief this tax break brings will be insignificant," complains Delhi-based financial consultant Mukesh Gupta of Wealthcare Securities.

Some other proposals in the Budget may leave investors with a hole in their pockets. Take the hike in dividend distribution tax. Here on, the dividends paid by money market mutual funds and liquid mutual funds will attract a tax rate of 25 per cent compared to 12 per cent till now. That means, the asset management companies will deduct a whopping 28 per cent by way of tax before they send you the dividend cheque. Explains Gaurav Mashruwala, Director, ace: "While the tax has been raised to 25 per cent, when you consider the surcharge and the cess, the effective deduction works out to about 28 per cent." The dividend distribution tax for non-asset management companies-that is, regular companies-has been increased from 12.5 to 15 per cent. But since it is the company that will be required to pay the tax, the shareholder won't be affected.

An additional cess, named "Secondary and Higher Education Cess on Income Tax", of 1 per cent is to be introduced. Effectively the cess component of the tax payable has gone up from 2 per cent to 3 per cent. Also, those who have an income above Rs. 5.5 lakh will end up paying marginally higher taxes.

Interest income in excess of Rs 10,000 from the Reserve Bank of India bonds will also be subject to tax. Until now, there was no upper limit to investments in tax-free bonds, as long as the money was from capital gains. But in the 2007-08 Budget, the Finance Minister has imposed a Rs 50-lakh limit. "The steps taken with respect to dividend distribution tax on mutual funds and TDS on bonds and other instruments are actually discouraging people from investing in anything other than fixed deposits," says Mashruwala. Adds Sandesh Kirkire, CEO, Kotak Asset Management: "The policies announced indicate a very complicated tax mechanism, which really confuses individuals and investors. Some of the moves will encourage litigation and, to a certain extent, hurt the corporates."

Last year, the Finance Minister had imposed a cash withdrawal tax in order to curb black money and the parallel economy. While he has retained the tax despite protests, he has increased the exemption limit for individuals and Hindu undivided families (HUFs) from Rs 25,000 to Rs 50,000. "It's good for the individual investor," says Gupta.

Where to put the Money

Well, that was as far as tax proposals were concerned. But if you are looking to invest your hard-earned money, then which direction is Budget 2007 pushing you? Don't go by the stock market's reaction of February 28. It was an unusual day because stock markets globally swooned too. Yes, the Sensex plunged 541 points to close the day at 12,938-its biggest drop since May 18, 2006-but equities ought to remain your preferred investment vehicle, simply because over the long run, they fetch the best returns.

"The increase in dividend distribution tax and education cess is certainly a negative from the investor's point of view, but hurts corporates as well" B. MUTHURAMAN MD/ Tata Steel

"The Finance Minister's focus on inclusive growth, particularly the thrust on the rural sector, will be good for the farm equipment business tractors" SIDDHARTHA ROY Chief Economist/Tata Sons

"The policies announced again indicate a very complicated tax mechanism, which really confuses individuals and investors" SANDESH KIRKIRE CEO/Kotak Asset Management

"Now, antiques, drawings, paintings, sculptures, and all other works of art have been brought under the definition of the term capital asset" MUKESH GUPTA Wealthcare Securities

"The steps taken with respect to dividend distribution tax on MFs and TDS on bonds are discouraging people from investing in anything other than FDs" GAURAV MASHRUWALA Director/ ACE

Yet, when you have large institutions such as Morgan Stanley urging investors to stay away from emerging markets such as India because they think the risk is higher than the expected returns, then you have to wonder if it's advisable to cut the exposure to stock markets. "For those investors who have been investing in emerging markets, it's a good idea to take money off the table," says an executive at a leading investment company.

However, if you believe in the long-term India story, then you should stay invested. "Certainly, the Budget will lift the spirits of sectors such as education, infrastructure, textile, hospitality and power equipment," says Ravi Sardana, Senior VP, ICICI Securities. The government, he points out, has laid adequate emphasis on completion of the highway projects, modernisation of the textile industry (via an increase in the Technology Upgradation Fund), and creation of opportunities for the power infrastructure firms. All these measures, Sardana says, could translate into strong performances on the stock market. Also, emphasis on farm and agriculture may see better performances by agri-based, food processing and agri-tool sectors.

What about the IT industry, which has been brought under the Minimum Alternative Tax net? MAT won't affect frontline it companies substantially, simply because they are hugely profitable, and it may be politically correct for them to start contributing to the national exchequer. However, the smaller it companies could take a hit. According to estimates, the impact on their net margins could vary from 1.5 to 2.5 per cent. Most analysts believe that the stock market will soon forget the mat effect on it stocks, since the industry growth is strong. What employees of it companies may not be able to forget in a hurry is the imposition of fringe benefit tax (FBT) on employee stock option schemes (ESOPs). "This could encourage companies to adopt an alternate mode of employee compensation," says C. Parthasarathy, Chairman, Karvy Group.

While some in the IT industry had been in favour of mat, the cement industry probably hadn't bargained for the yorker that the Finance Minister hurled at them. We are, of course, referring to his decision to check the increase in cement prices by alternately incentivising and penalising cement manufacturers. He has proposed to reduce the excise duty on cement by Rs 50 to Rs 350 per tonne for those manufacturers who sell a 50-kg bag for Rs 190. Those who sell above that figure, will have to pay Rs 600 per tonne as excise instead of Rs 400. "Such proposals cannot control cement prices," says Krishna Kumar Karwa, Managing Director, Emkay Share & Stock Brokers. "The basic economics of demand and supply will overrule everything else."

Bet on Infrastructure

But things might just look up for the mutual fund sector as steps have been initiated to promote the flow of investment to the infrastructure sector by permitting mutual funds to launch and operate dedicated infrastructure funds. Also, the move to converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds may work in a positive way in the long run for investors.

More importantly, the move to allow short selling by institutions and allowing Indian companies to issue exchangeable bonds to unlock a part of their holdings in group companies will have a positive impact. A big surprise has been the impact on money market mutual funds. The increase in dividend distribution tax will reduce the tax arbitrage and make fixed deposits more attractive. "There is a 180-degree difference between what was expected from the Budget for debt mutual funds and what it eventually offered," says Mashruwala. "To that extent, this category of investment will surely get affected and debt funds will come at par with bank fixed deposits," he adds.

As for the booming realty sector, the FM has left it largely untouched as far as the common investor is concerned. But senior citizens may stand to benefit from a novel scheme of reverse mortgage that the National Housing Bank (NHB) will shortly introduce. "Under this, a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan," Chidambaram said in his Budget speech. Needless to say, with this proposal, Chidambaram may have secured the votes of at least one section of India's population.