More taxes, additional deductions but no impact on investments

There were huge expectations from the first full-fledged budget of National Democratic Alliance after coming to power last year.  In this post, we shall review the measures proposed in the budget which shall have impact on individual tax payers and their investments.

Major revenue booster

One of the measures having significant impact on the revenue collection is additional surcharge of 2% over and above existing 10% surcharge for individuals having taxable income of more than Rs. 1 crore.  This additional surcharge is in response of abolition of wealth tax.  While the abolition of wealth tax was a long pending demand, 2% additional surcharge shall more than compensate any loss to the exchequer on account of wealth tax abolition.  To quantify, wealth tax generated revenues of Rs. 844 crores in FY 2012-13, whereas 2% additional surcharge on all taxpayers (including domestic companies) is estimated to generate Rs. 9,000 crores to the government.

Effective rate for service tax has been increased from 12.36% to 14%.  There is also an enabling provision in the budget to allow Government to levy additional surcharge of 2% to achieve Swachh Bharat objectives.  Excise duties are ‘rationalized’ by increasing it moderately from 12.36% to 12.5%.  These changes in service tax and excise duties shall make almost all the things under the sun dearer.

Surcharge on dividend distribution tax on dividend received from debt funds has been increased from 10% to 12%.  Thus the effective DDT rates for retail investors in debt funds shall marginally increased to 28.84% from existing 28.352%.  

Correcting loopholes

Another measure which has missed the limelight of the media is TDS on deposits with banks. Currently Rs. 10,000 threshold for determining whether TDS is to be deducted was applied on each branch of the bank.  Thus if an individual had fixed deposits in two branches of the same bank earning total interest of more than Rs. 10,000, however the interest earned in each of the individual branch was less than Rs. 10,000, TDS was not required to be deducted.  This loophole has been rectified.  Now, the threshold interest amount shall be determined at bank level instead of branch level.  This is applicable for all banks following core banking solutions (who doesn’t nowadays?) and is effective from 1^st June 2015.

Increased and new deductions

These primarily relates to health related expenditures and can be best explained by way of following table:

Expenditure incurred on	Self and Family (spouse and dependent children)	Parent
A.      Medical premium	Rs. 25,000	Rs. 25,000 (if Senior citizen – aged 60  years and above, then Rs. 30,000)
B.      Medical Expenditure in case of very senior citizen (aged 80 years and above) provided such citizen is not covered under any medical insurance plan	Rs. 30,000	Rs. 30,000
C.      Total Deduction under A and B capped at	Rs. 30,000	Rs. 30,000

Further limits for few other deductions is increased.  Now individuals can claim deductions to the extent of Rs. 40,000 for certain chronic diseases such as cancer, aids, etc.  In case such expenditure is for senior citizen (self or dependent relative), the deduction is Rs. 60,000 and for very senior citizen, it shall be Rs. 80,000.

One important hidden change is deleting the requirement for providing certificate in prescribed form from the specialist doctor working in Government hospital to claim this deduction.  Now a prescription from a specialist doctor for medical treatment shall be sufficient document to claim this deduction.  This shall certainly lessen the hardship for individuals.

Deductions with respect to medical expenditure for persons with disability has been increased from Rs. 50,000 to Rs. 75,000 and persons with severe disability has been increased from Rs. 1,00,000 to Rs. 1,25,000.

Deduction on account of payment made to LIC or other insurers for annuity plan has been enhanced from existing Rs. 1,00,000 to Rs. 1,50,000.  However this is within the overall limit of Rs. 1,50,000 and may not benefit individuals if they are exhausting their limits by other means such as insurance premium, PPF deposits, etc.

Additional deduction of Rs. 50,000 over and above existing deduction of Rs. 1,00,000 is proposed for contributions made by an individual to a notified pension scheme.  This is aimed at to boost NPS as well as encourage additional investments for retirement benefits.

Further the recently introduced Sukanya Samriddhi Account Scheme by Prime Minister Narendra Modi got a boost by including any investments into that scheme eligible for deduction under Section 80C within the overall limits of Rs. 1,50,000.  Further any interest accrued on such deposits as well as withdrawals in accordance with the scheme shall be exempt from tax.

Another pet project of the Prime Minister, Swachh Bharat, got its mention in the budget.  Any donations made to Swachh Bharat Mission as well as Clean Ganga fund shall be eligible for 100% deduction.  This is applicable retrospectively from 1^st April 2014. 

There is some reference to flexibility for employees to choose between employee provident fund and national pension scheme and exemption from contribution to EPF for employees below a certain threshold of monthly income.  However, there is not much clarity at this point of time on how this will be implemented and administered.

Bachhat’s take

Overall, things change a little for individual taxpayers in this budget.  There shall be lesser savings on account of rise in overall expenditures by way of excise and service tax hikes, but additional deductions can be claimed on account of certain expenses like health related and investments like NPS and Sukanya Samriddhi.  There is no change in slab rates, basic exemption limits, and capital gain tax.  From personal finance point of view, no need to review your existing investments and no game changer.  But hey, it was not expected to be!!!

Do pour in your comments on the budget.

Updated for DDT on debt funds and EPF / NPS portability.