Is Demonetization Good for Salaried Professionals?

It has been more than 3 weeks since 500 and 1000 rupee notes have been demonetized. Some are hailing it as the biggest reform to hit India since 1991. Only time will reveal how this move affects the economy a few months down the line. But one thing is for sure, we are already seeing a lot of turmoil in our lives. From queuing in ATM/bank lines to deposit/withdraw cash to switching to cashless transactions, we are all changing our equations with physical money at least in the short term.

As per RBI estimates, about 85% of currency in circulation comprised of high denomination notes of Rs. 500 and Rs. 1000. This is estimated to be worth  more than 14 lakh crores by value. Banks/RBI have already collected 60% of the said amount. As per the latest data issued by RBI, more than Rs. 8 lakh crores have already been deposited/ exchanged from the banks/ post offices/ RBI till 27^th November 2016.

Let us explore how demonetization affects salaried professionals:

Direct Impact

Salary by Cheque and Bank Transfer

Those who get their salary by cheque or bank transfers have nothing to worry. If you have been paying your taxes, you can deposit the cash at home. There is no added tax liability if the cash at hand is in tandem with your earnings/ withdrawals from the bank accounts.

Salary by Cash

Those who receive salary by cash can deposit the salary received in the bank.

Further, keeping the household savings patterns in mind, the government allows you to deposit up to Rs. 2.50 lakhs of cash in bank accounts. However, if the case is selected for scrutiny later, you should be able to explain the sources of cash deposited. And the same should be justified with the income/ cash withdrawals of the account holder. Thus, one needs to be careful while depositing cash in the bank and also make sure that the exceptional cash deposits are accounted for in the income tax return.

If you do a cash transaction above Rs. 50000 then you will need to provide your PAN card details. Transactions totalling Rs. 2.5 lakhs during the period this demonetization window is open i.e. 8th November to 30th December will need PAN details as well. If you do not have a PAN card, you will need to apply for it. Further, all the cash deposits aggregating to Rs. 2.50 lakhs or more in bank accounts will be reported by the banks to Income Tax Department.

Taxing of Unaccounted Money

If you have any unaccounted for cash at home, you can declare it now. You need to pay 49.90% on this amount which includes 30% tax, 33% surcharge on tax and 10% penalty. You will need to put 25% of the remaining account in specified account (details by Govt.) and have the remaining 25% for use at your disposal immediately.. This is as per the Income Tax Declaration Scheme introduced through Income Tax Amendment Bill placed in the Parliament yesterday.

Indirect Impact

Increased Liquidity

Bank balances for savings and current account will swell with deposit of old notes. This will increase CASA for the banks. To check this, RBI has introduced 100% CRR requirement. This is for incremental deposits between 16th September to 12th November.

Lowering of Interest Rates

As banks see an increase in their liquidity, loans will get cheaper. This is good news for home, auto and other personal loans. Thus, an average citizen will find it easier to get a loan at lower rates.

Lowering of Real Estate Rates

With the curbing of the cash economy, real estate transactions in the secondary market will see a dip. Thus, the prices of properties will move towards an affordable range. Real estate rates will see a downward correction.

GDP Growth

A temporary and short-term dip in GDP is expected due to current cash crunch. But the GDP will grow in the longer term with increased liquidity and consumer spending.

This GDP growth will give rise to better career and start-up opportunities. This will benefit salaried professionals.

But, the flip side to demonetization is that the interest rates on fixed deposits with banks will fall. This is the time to switch to more lucrative investment options.

Investment Options

Capital markets will become more attractive investment options as:

a) Returns from current investment options like FDs and housing  will fall due to demonetization.

b) With falling interest rates and GDP growth, companies are expected to grow faster and show better profitability. This will  provide higher returns to investors over medium to long term.

Thus, instead of the traditional savings instruments of FDs/ RDs, a switch to FMPs, bonds & equities can be made. With interest rates falling, bonds will give good returns in the short to medium term. For those looking for medium to long-term investments, equities can be expected to do well due to growth in the economy.

GDP growth will herald better career and start-up opportunities that will benefit salaried professionals.

Final Word

This is a welcome move by the government that will have a positive impact on the economy. It definitely is good news for salaried professionals in terms of affordable housing and cheaper loans.