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.

Impact of Budget 2012 on Individual Tax Payers

I have tried to calculate the tax implications of various announcements made in Budget 2013 for individual tax payers.  The calculations are carried out for individuals for income slabs for Rs. 5 lakhs, Rs 7 lakhs, Rs. 10 lakhs, and Rs. 15 lakhs.

Do have a look at it.  But a word of caution, these calculations are based on various assumptions I have made and the final tax liability may be different for individuals having the same income.

Budget 2013 and Impact of taxes on your salaries

Time for prudence, restraint and patience

“In a constrained economy, there is little room to raise tax rates or large amounts of additional tax revenues. Equally, there is little room to give away tax revenues or the tax base. It is a time for prudence, restraint and patience.” 

This statement made by Honorable finance minister Mr. P.Chidambaram summarizes what is (or is not) in store for individuals in this budget.  There has been no change in the income slabs based on which tax is determined.  To benefit individuals who earn less than Rs. 5 lakhs per annum, a minuscule tax credit of rupees two thousand has been given.  Besides this there is hardly any permanent additional benefit for individuals in the budget.  Certain changes which shall impact your tax liability and determine your investments are covered below.

Interest on home loan eligible up to Rs. 2.5 lakh

An individual planning to purchase residential housing property shall get an additional deduction of Rs. 1 lakh on the interest amount paid to service the home loan.  However, this benefit comes with many riders.  First, this benefit is for individuals who do not own any residential properties at the time of sanction of loan amount.  Second, the value of such property should not exceed Rs. 40 lakhs.  Third, the home loan amount should not exceed Rs. 25 lakhs and it should be sanctioned in financial year 2013-14.  If the interest amount during the year is less than Rs. 1 lakh, the balance amount can be claimed in the subsequent year. 

Scope of RGESS widened

Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the last budget to attract new retail investors to invest in equities.  The scope of the scheme has been increased to cover listed units of an equity oriented mutual fund and individuals having total income upto Rs. 12 lakhs are now elligible to claim this deduction.  The deduction, which was earlier restricted for one year, is now available for 3 consecutive years from the date of first such investment.

Other changes which impacts your investment decisions

The securities transaction tax (STT) on equity oriented mutual fund has been reduced which shall lead to increased returns from equity mutual fund investments.

On the other hand, dividend distribution tax on debt oriented mutual funds has been increased from 12.5% to 25% discouraging debt oriented mutual funds with dividend payout option.

Any transfer of immovable property, other than agricultural land, of value equal to or exceeding Rs. 50 lakhs shall attract 1%  TDS on the property value.

Further it has been proposed that where any immovable property is received for a consideration less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of individual.

Commodity transaction tax has been introduced wherein sale of commodity derivatives (other than those involving agricultural commodities) shall attract transaction tax @ 0.01%.

On positive side, the finance minister has proposed introduction of inflation indexed bonds or inflation indexed national security certificates.  This shall give investor inflation adjusted interest returns and shall be a good investment alternative.  The tax free bonds, which provide tax free interest to the investors, shall continue to be issued in the next year.

(Concise version of the above post was printed in DNA's edition of 1st March 2013)

Budget Rollbacks – respite for property buyers and jewellery merchants

Yesterday, Finance Minister Pranab Mukherjee announced few rollbacks from the budget proposals in his opening speech to discuss the Finance Bill 2012 in Lok Sabha. 

The rollbacks affecting individuals and investments are given below.  To help understand the rollback better, initial budget proposal is listed first, followed by the rollback proposed yesterday.

Budget Proposal: W.e.f October 2012, sale of residential property for transaction value more than Rs. 50 lakhs in specified urban agglomeration or Rs. 20 lakhs in any other area shall attract tax deduction at source of 1% of the transaction value irrespectively whether the transfer is profitable or not.

Revised Proposal: The above proposal has been withdrawn and there shall not be tax deduction at source on sale of residential property.

Budget Proposal: Cash purchase of bullion and jewellery for amount more than Rs. 2 lakhs shall lead to tax collection of 1% of the value by the seller.

Revised Proposal: The threshold limit of Rs. 2 lakhs has been increased to Rs. 5 lakhs in case of cash purchase of jewellery. The threshold limit for cash purchase of bullion has been retained at Rs. 2 lakhs.  However, it is clarified that bullion will not include any coin or other article weighing 10 gms or less.

Budget Proposal:  Imposition of central excise duty on unbranded precious metal jewellery at the rate of 1%.

Revised Proposal: The levy of central excise duty on all precious metal jewellery, branded and unbranded, has been withdrawn.

Additional Proposal:  Sale of unlisted securities in an initial public offer, which were hitherto charged to capital gain tax, shall be exempted from long term capital gains tax.  Instead of long term capital gains tax, securities transaction tax @ 0.2% shall be levied on such sales.  However, short term capital gains tax on such sale is still applicable at marginal tax rate.

Thus it can be seen that the long nation-wide strike by jewellery merchants has been effective and they got the rollback sought for.  However, Finance Minister failed to provide clarity on the Rajiv Gandhi Equity Scheme, which proposed to give 50% deduction of investment made in equities by individuals earning less than Rs. 10 lakhs.  The nature of such scheme and its benefit to investors at large remains unclear.

Revision of tax slabs and its impact on tax outgo

Quick analysis of revision of tax slabs and its impact on tax outgo.  Overall male tax payers less than 60 years of age benefits the most and there is now no differentiation between male and female tax payers.

Tax slab revision and its impact



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Impact of Budget 2012 on Individual Tax Payers

I have tried to calculate the tax implications of various announcements made in Budget 2012 for individual tax payers. The calculations are carried out for individuals with income slabs for Rs. 3 lakhs, Rs. 5 lakhs, Rs. 10 lakhs, Rs. 15 lakhs and Rs. 20 lakhs.

Budget 2012 and Individual Taxpayers


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Modified version of the above table appeared in DNA Newspaper dated 17th March 2012.

“I MUST BE CRUEL ONLY TO BE KIND”

Impact of budget on an individual taxpayer 

Honourable Finance Minister quoted Shakespeare's immortal words “I must be cruel only to be kind” before beginning his speech on tax proposals.  However for an individual, the budget seems to be a mix of kind and cruel treatment.  Kind enough to tweak the tax slabs favorably and providing additional tax deduction avenues in the form of interest income from savings account deposit and preventive medical check-up and cruel enough to take the entire benefit by way of increase in service tax and excise duty rates. 

THE KIND TREATMENT

The largest benefit given to individual tax payers in the budget is the favourable revision of tax slabs.  The exemption limit has been increased from Rs. 1,80,000 to Rs. 2,00,000 for all individuals (males and females aged less than 60 years).   Taxable income more than Rs. 8,00,000 and less than Rs. 10,00,000 which currently is taxed at 30% shall be taxed at 20% after the budget announcement.  This is a clear benefit of Rs. 20,000 for individuals earning more than Rs. 8,00,000.  The revised tax slabs now are - 10% tax rate for taxable income greater than Rs. 2,00,000 to Rs. 5,00,000; 20% tax rate for taxable income greater than Rs. 5,00,000 to Rs. 10,000,000 and 30% tax rate for taxable income greater than Rs. 10,000,000.

The deductions available for individuals have also increased by making interest income from saving account deposits up to Rs. 10,000 eligible for deduction from taxable income.  In addition, the finance minister has introduced one more avenue for tax deduction – Rajiv Gandhi Equity Scheme (RGES).  Though the details of the scheme are not cleared, investment in equity up to Rs. 50,000 shall be eligible for 50% deduction for individuals earning less than Rs. 10 lakhs.  However, such investment shall have locked in of 3 years.

Further,  expenditure incurred for preventive medical check-up for self, spouse, dependent children or parents up to Rs. 5,000 shall be eligible to be included under overall deduction of Rs. 15,000 under Section 80D.

There are further smaller relief like reduction in the securities transaction tax on delivery based transactions of equity securities from 0.125% to 0.1% of the transaction value and increase in threshold from Rs. 2,500 to Rs. 5,000 for deducting tax on interest from debentures.  Further both listed and non-listed debentures get covered now under the above criteria.

Last year, budget incorporated a provision that the life insurance premium, in order to get benefit under Section 80C, should not be more than 20% of the actual capital sum assured.  Now the budget has proposed that the premium should not be more than 10% of the actual capital sum assured.  This is good for the customers, since this shall result in enhanced insurance coverage for the same amount of premium.  Further the budget also specifies in detail how the capital sum assured shall be calculated so that insurance company do not circumvent this provision by varying the sum assured from year to year. 

THE CRUEL TREATMENT

The cruelest shock in the budget for individuals is the increase in service tax rate from 10% to 12%.  There has also been hike in excise duty rates and this along with service tax rate increase almost negate the benefit of tax savings on account of slab revision.  This shall maintain the inflationary pressure on the prices and shall ensure that interest rates of loan remain high for substantial part of the year.

Further w.e.f October 2012, sale of residential property for transaction value more than Rs. 50 lakhs in specified urban agglomeration or Rs. 20 lakhs in any other area shall attract tax deduction at source of 1% of the transaction value irrespectively whether the transfer is profitable or not.  Individuals cannot evade this, since it has been made mandatory to provide proof of tax deduction while registering the transfer.

Cash purchase of bullion and jewellery for amount more than Rs. 2 lakhs shall lead to tax collection of 1% of the value by the seller.

In case, one has any asset located outside India (financial or otherwise), he has to compulsorily file return of income in India irrespective of whether he has taxable income or not. 

BEING SIXTY GETS MORE SWEETER

After reducing the senior citizen age limit from 65 years to 60 years last year, the fascination of Mr. Mukherjee for senior citizen continues and he has exempted them from paying advance tax in case they do not earn any income from business and profession.  Further the age limits in Section 80D (Health Insurance Premium) and Section 80DDB (treatment of specified ailment) and for no tax deduction certificate has been rationalized to 60 years from 65 years at present. 

Thus it can be seen that the budget is a mixed bag of kind and cruel treatment for an individual taxpayer. 

Modified version of the article to appear in DNA Newspaper dated 17th March 2012

Happy Retirement: Your tax liability decreases as you grow older

One category of individuals who are smiling their way to bank is senior citizens.  Finance minister said that 3 is lucky number for him and he has showered triple bonanza for senior citizens. 

 

First of all, the age limit to qualify for senior citizenship has been reduced by 5 years from 65 to 60 years. The individuals who fall under this category will see their tax outgo reducing by Rs. 9,270 for male individuals and Rs. 6,180 for female individuals.

Secondly, the basic exemption limit is marginally enhanced from Rs. 2,40,000 to Rs. 2,50,000 leading to a tax saving of Rs. 1,030.

However, the main benefit to senior citizens comes once they reached 80 years of age.  Such individuals are classified as ‘Very Senior Citizens’ and for them the basic exemption limits have been hiked to Rs. 5,00,000.  This is more than double of the existing limits of Rs. 2,40,000 and will lead to substantial tax saving of Rs. 26,780.

The table below gives an overview of how the senior citizens have benefitted from the budget proposals.

Taxable Income	Males (aged 60 to 65 yrs)			Females (aged 60 to 65 yrs)
	Existing	Proposed	Savings	Existing	Proposed	Savings
5 Lakh	14,420	5,150	9,270	11,330	5,150	6,180
10 Lakh	35,020	25,750	9,270	31,930	25,750	6,180
15 Lakh	158,620	149,350	9,270	155,530	14,9350	6,180
20 Lakh	313,120	303,850	9,270	310,030	30,3850	6.180

Taxable Income	Senior Citizens (aged 60 yrs & above but less than 80 yrs)			Very Senior Citizens (aged 80 yrs and above)
	Existing	Proposed	Savings	Existing	Proposed	Savings
5 Lakh	26,780	25,750	1,030	26,780	NIL	26,780
10 Lakh	150,380	149,350	1,030	150,380	123,600	26,780
15 Lakh	304,880	303,850	1,030	304,880	278,100	26,780
20 Lakh	459,380	458,350	1,030	459,380	432,600	26,780

This article was also carried in Mumbai's edition of DNA of 1st March 2011.

Little for salaried individuals in this budget

Main Tables

Honourable Finance Minister started his tax proposals with the words “In the formulation of these proposals, my priorities are directed towards making taxes moderate, payments simple for the taxpayer and collection of taxes easy for the tax collector”.  However, these priorities were not reflected in this year’s budget.  Atleast not for the individual tax payers.  One of the reasons may be the implementation of Direct Tax Code (DTC) from next year.  Since major changes and rationalization of slabs are expected to happen in DTC, there has not been any tweaking with the tax rates this year.  The basic exemption limits has been moderately hiked from existing Rs. 1,60,000 for males to Rs. 1,80,000.  This will lead to a nominal tax saving of Rs 2,060 for male individuals.  However, their female counterparts are not so lucky with nothing in store for them this time.  The tax slabs and rates remains the same for them and hence there will be no change in their tax liabilities.

Investment in New Pension Scheme (NPS) was made tax-free couple of years back when it was brought under the investment limits of Rs 1,00,000 under Section 80C.  Such investments up to 10% of the employee’s salary were included for calculation of Rs. 1,00,000 limit.  This amount can be either by employee investing himself or employer contributing to NPS on employee’s behalf.  Now, the employer’s contribution is proposed to be removed from Rs. 1,00,000 limit.  This means that amount invested by employer in NPS on behalf an employee, subject to the cap of 10% of the salary, will be allowed as deduction over and above Rs. 1,00,000 limits under Section 80C.  Further such employer’s contributions will also be allowed as business expenditure for the companies.  This will encourage investments in New Pension Scheme.

The benefit under Section 80CCF of Rs. 20,000 invested in infrastructure bonds is extended for additional one year.

Another welcome change is doing away with the requirement of filing of Income Tax return in case the tax has been deducted by employer.  In post-budget press conference, CBDT Chairman Sudhir Chandra hinted that salaried individuals having income up to Rs. 5 lakh need not file the return.  If the individual wishes to opt for this, he needs to disclose his other income such as interest, etc to the employer for tax deduction.  However, in case individuals have any other sources of income such as capital gains or house property income, they needs to file the return with the tax authorities.  More clarity on this is expected to emerge in coming months.

This post was also carried in Mumbai edition of DNA of 1st March 2011.