The Union Budget was presented today by the Finance Minister. Here is list of key budget announcements.
1. Reduction in tax rate in tax slab of Rs 2.5 lacs to Rs 5 lacs from 10% to 5%
This will bring cheers to many tax payers. For detailed illustration about the tax savings, you can go through this post. For tax-payers in 10% tax bracket, this will result in tax-saving up to Rs 7,500. For tax payers in the higher income tax bracket, there will be tax saving of Rs 12,500.
There is a caveat though in terms of introduction of surcharge for tax payers with income between Rs 50 lacs and Rs 1 crore. This aspect is discussed in the next point.
2. Surcharge of 10% for taxpayers with taxable income between Rs 50 lacs and Rs 1 crore
This is a spoiler for those whose income falls between Rs 50 lacs and Rs 1 crore. This hit is likely to be much bigger than Rs 12,500 (due to reduction in slab rate). If your income is Rs 75 lacs, your tax liability will go up by almost Rs 2 lacs. Surcharge for income above Rs 1 crores remain at 15%.
3. Reduction in rebate under Section 87A from Rs 5,000 to Rs 2,500
The applicable limit has also been reduced from Rs 5 lacs to Rs 3.5 lacs i.e. only tax payers with total income of less than or equal to Rs 3.5 lacs will get this rebate. Earlier, the limit was Rs 5 lacs. From the perspective of the Government, this compensates for the reduction in tax rate for tax slab of Rs 2.5 lacs to Rs 5 lacs.
4. Set off of loss under Income from House Property capped at Rs 2 lacs
You can now adjust the loss from house property only to the extent of Rs 2 lacs per financial year. Earlier, there was no cap. There is a serious jolt to many real estate investors/buyers. Clause 3A has been inserted under Section 71 to effect this change
So, if you were earning a rental income of Rs 2 lacs (ignoring standard deduction etc) and were paying interest of Rs 5 lacs, you could set off the entire loss of Rs 3 lacs against other heads(say, against your salary). Now, the set-off is capped at Rs 2 lacs per financial year.
So, now, income tax benefit for self-occupied property is almost in line with let-out properties.
I am sure this will upset excel models and investment plans of many real estate investors. As I understand, you can still carry forward losses but Government has clearly plugged the loophole.
5. Base year for calculation of indexation changed from 1981 to 2001
This is beneficial and may help reduce capital gains tax liability, especially for assets purchased before 2001. So, you may purchased an asset in 1985 and plan to sell it this year, you have an option to consider your acquisition price or the Fair Market Value (as on April 1, 2001) as your purchase price. Subsequently, indexation will apply.
As I understand, appreciation in price of your asset till 2001 becomes tax-free for you (please do not take this literally).
This move is likely to bring down capital gains tax liability for you.
6. Holding period for Real estate reduced from 3 years to 2 years
You need to hold your real estate for only 2 years before the resulting capital gains from the sale of house qualify as long term capital gains.
Earlier, you needed to hold for 3 years. I do not get the head and tail of motive behind this move except to bring down capital gains tax liability for the investors (that too in select cases). At a time when the Government should be simplifying tax rules, it is adding exceptions.
7. Tax treatment of Partial Withdrawals from NPS
As per revised NPS withdrawal guidelines, partial withdrawal up to 25% of own contribution (excluding contribution from the employer) is allowed after 10 years for defined expenses.
It has been proposed to add clause 12(B) in Section 10 to make such withdrawals (up to 25% of own contribution) exempt from income tax.
It is a welcome move. There was lack of clarity on this topic earlier.
8. Change in NPS (National Pension Scheme)
A minor change has been made to Section 80CCD(1). Earlier, self-employed could contribute up to 10% of gross total income. Well, they could contribute more but the tax benefit was capped at 10% of gross total income. Now, the number has been proposed to enhance to 20% of gross total income.
There is no such change for salaried employees. The limit for employees remains at 10% of salary.
In my opinion, this does not change anything. In any case, there is no change for salaried employees. For self-employed, I do not see any reason why you would invest in NPS other than to take exclusive tax benefit of Rs 50,000 under Section 80CCD(1B).
And no change has been made to Section 80CCD(1B). Therefore, NPS subscribers continue to enjoy exclusive tax benefit of Rs 50,000 per financial year for contribution to NPS.
9. Penalty for delay in filing income tax return
If you file returns after the due date and on or before December 31, such penalty for delay shall be Rs 5,000. In any other case, it shall be Rs 10,000. If the total income of the assessee does not exceed Rs 5 lacs, the penalty will not exceed Rs 1,000. You need to file your income tax return on time.
Other Points to Note
- People who are filing income tax returns for the first time will not under Scrutiny (barring an exceptional case)
- For donation to charitable institutions under Section 80G, the limit for cash donation has been reduced from Rs 10,000 to Rs 2,000.
- No cash transaction above Rs 3 lacs is permitted. No person can receive a payment or aggregate of payments in cash of Rs 3 lacs or more from a single person or a single day or in respect of transactions relating to single event or occasion.
- Scope of Section 54EC to save long term capital gains tax has been enhanced to include any bonds notified by the Central Government. Earlier, only NHAI and REC bonds were permitted.
- Maximum cash donation to political parties has been capped at 2,000. Earlier, the limit was Rs 20,000.
- Amendment proposed to RBI Act for issuance of bearer electoral bonds. So, if you want to donate to a political party, you can purchase such bonds from a bank (payment through your bank account) and hand over to the political party. The political party can encash the bonds in a designated bank account.
- Income tax return needs to be filed within 1 year from the end of financial year.
- For taxable income of up to Rs 5 lacs, there will be a single page income tax return form. Not applicable if you have business income.
- If you are paying rent in excess of Rs 50,000 per month, you need to deduct TDS at the rate of 5%.
- Long Term Capital Gains on sale of equity shares remain exempt from income tax. There is only a minor change. For tax exemption, STT needs to be paid both at the time of sale and purchase. Earlier, STT requirement was only for the Sale of shares. There are a few exceptions though.
The above post is based on my understanding of the Finance Bill. I am not a tax expert. You are advised to seek advice from a Chartered Accountant before taking any action. Additionally, I have merely written down proposals. These proposals will come into force once the Finance Bill is passed by the Parliament. Therefore, these proposals may be withdrawn/amended before passage of the Finance Act.