All you need to know about the Budget to realign your finances with the new tax rules.
The Sensex, Bombay Stock Exchange’s benchmark index, went up by around 500 points on Budget day, riding on the good news that there was no change in the rules for long-term capital gains (LTCG) for equities, as thousands of investors heaved a sigh of relief. There were speculations that the Budget would extend the minimum holding period for LTCG from one year to two-three years which could have slowed down investments in equities especially since retail investors have started dabbling in the stock markets through the mutual funds route. The real estate sector, meanwhile, has benefitted with the holding period reduced from three years to two years, for calculation of long term gains.
There were disappointments as well, one of which is the reduction in tax rebate. Those earning rental incomes from homes financed by a bank will have to pay more taxes from the next year. And if you are a smoker, there is more bad news – the excise duty on cigar, cigarettes, and other tobacco substitutes has been hiked from Rs 3,755 per thousand to Rs 4,006 per thousand.
The intention behind the Budget was evidently two-pronged – widen the tax base and encourage people to embrace the digital economy. The Finance Minister, in his Budget speech, lamented that ours was largely a tax non-compliant society with a huge mismatch between tax collections, and income and expenditure patterns. Only 24 lakh people show an annual income exceeding Rs 10 lakh, though more than 1.25 crore cars were sold in the past five years and over two crore Indians went abroad in 2015, he said, highlighting the paradox.
In a bid to curb black money, no transactions above Rs 3 lakh will be permitted in cash. It is a welcome move, even though not fool proof – one can make transactions by splitting a single bill into multiple bills of Rs 2.9 lakh each. Providing further impetus to digital economy, the government will soon authorise the use of digital payment methods, including the BHIM app, in petrol pumps, hospitals, universities, colleges and other institutions. Service tax on online booking of railway tickets has also been waived off.
We delve deeper in to the proposals made by the Finance Minister, to apprise you of their possible impact on your finances.
FOR THE SALARIED CLASS
Barring the reduction of income tax rate for income slab of Rs 2.5 lakh – Rs 5 lakh – from 10 per cent to five per cent – FM Arun Jaitley kept various other deduction limits unchanged, bringing little cheer for the salaried class. This reduction in tax rate will result in a tax benefit of Rs 12,500 for taxpayers. If you add education cess (2 per cent), and higher and secondary education cess (1 per cent) to it, the tax saving will increase to Rs 12,875. However, the tax rebate enjoyed by the taxpayers under Section 87A has been reduced from Rs 5,000 to Rs 2,500. Earlier, it was available to those with a taxable income of Rs. 5 lakh, whereas now the limit has been reduced to Rs 3.5 lakh.
The theme of Budget 2017 was to reward the honest taxpayer, and widen the tax base by taxing the rich. The 10 per cent surcharge imposed on individuals with income between Rs 50 lakh to Rs 1 crore will increase the tax liability of a person having a taxable income of Rs 75 lakh by around Rs 2 lakh. The existing surcharge of 15 per cent on those with an income of over Rs 1 crore in a financial year remains.
Tax Evasion Made Tougher: In order to reduce tax evasion, and encourage more people to file tax returns, FM has proposed a new one-page form for those who have a taxable income of up to Rs 5 lakh, other than business income. Apart from this, there will be no scrutiny of the first-time return filer for the year 2017-18, if the taxable income does not exceed Rs 5 lakh for that year.
However, any taxpayer who is eligible to file tax return will face higher penalty in case he or she delays the filing of income tax return after the due date – July 31 of the assessment year is generally the last date. A tax penalty of Rs 5,000 will be levied if returns are filed after this date, and Rs 10,000, if filed after December 31 of the assessment year. However, for small taxpayers with income not exceeding Rs 5 lakh for a financial year, the penalty will be Rs 1,000 for delay in filing tax return.
Earlier a taxpayer could file return till the end of the assessment year, and was penalised with a fine of Rs 5,000 at the discretion of the tax officer in case of delay.
The time period for revising a tax return has been reduced to 12 months from completion of the financial year. The time frame for scrutiny assessments has been reduced from 21 months to 18 months for the next financial year, and is slated to be reduced further to 12 months from 2018-19.
HRA Claims Under Scanner: It will be now be mandatory for those claiming a House Rent Allowance (HRA) of more than Rs 50,000 per month to deduct tax at source at the rate of 5 per cent. The TDS will have to be deducted on the last month of the year in which rent is paid or the last month of tenancy. In case the landlord (payee) does not have a Permanent Account Number (PAN), the tax deduction shall not exceed the amount of rent payable for the last month of the previous year, or the last month of the tenancy. From the government’s perspective, this amendment will ensure that there are no revenue leakages on account of such rental income.
This will also discourage people who claim HRA deduction by quoting wrong PAN numbers of their landlords. Quoting PAN number of the landlord was mandatory in case the rent paid during the year was more than Rs 1 lakh.
“This has primarily been introduced to check evasion in cases where the salaried individuals were claiming HRA exemption against bogus rent receipts. Though requirement for furnishing PAN for landlord was already there if the rent exceeds Rs 1 lakh per year, it was not proving to be an effective trail as the employer was never checking the authenticity of the PAN. In such cases, persons claiming HRA for rent exceeding this amount is required to deduct 5 per cent tax on rent paid to landlords,” explains Amit Maheshwari, Partner at Ashok Maheshwary & Associates LLP. These proposed changes will take effect from June 1, 2017.
FOR HOME BUYERS
The real estate sector has been most pleased with this Budget. After several unyielding years, it could well embark on the path to recovery.
More Gains: You can now sell a property after two years of buying it as the holding period for computation of long term gains has been reduced to two years, from the existing period of three years. This is a great move to boost demand after sales dropped significantly post demonetisation.
Besides, the base year for indexation has been shifted from 1-4-1981 to 1-4-2001. Indexation means adjusting the impact of inflation during the holding period of the capital asset so that it reflects the current market prices. The shift in base year will result in less tax liability for the buyer. The finance minister also announced that one will be able to reinvest capital gains in notified redeemable bonds beyond NHAI and REC for tax exemption on long term capital gains.
Anil Chopra, Group CEO & Director, Bajaj Capital, believes that the reduction in holding period “will spur sales and purchase activity in the real estate sector.”
Another positive move is the change in eligibility criteria for affordable housing from built-up area to carpet area. Shishir Baijal, Chairman & Managing Director, Knight Frank India, says, “This will increase the unit size by 20-30 per cent, and will offer home buyers the benefit of owning larger units. This will also encourage leading real estate players to enter the affordable housing segment.”
Rental Income Woes: There is unpleasant news for people earning rental income on a house financed by a bank. The government has restricted the set-off of ‘loss from house property’ from other income streams to Rs 2 lakh in a financial year. The balance loss is allowed to be carried forward for up to eight years.
Experts say this could adversely impact those who invest in house property using housing loan, primarily for earning rental income. Earlier, the entire amount paid towards the interest of the rented property was allowed to be claimed as deduction from income from house property. It often resulted in loss from house property, and was allowed to be set off against any other head of income in that year. However, the Rs 2 lakh cap would mean taxpayers may not be able to fully absorb the loss in the same year or in the subsequent year, in case they don’t have sufficient house property rental income. The intention is to correct the anomaly between tax benefits allowed for self-occupied and rented-out property, and discourage purchasing of properties for investment purposes. For taxpayers with self-occupied house property, the amount of deduction that can be claimed on account of interest is restricted to Rs 2 lakh (as per Section 24(b) of the Income Tax Act, 1961). The proposed change may not impact this category of taxpayers.
FOR SENIOR CITIZENS
Senior citizens need regular income in their sunset years. But with interest rates falling, fixed deposits have not been a lucrative option for many. The government’s 8 per cent guaranteed return policy has brought in some relief.
Varishtha Pension Bima Yojana: Under the scheme, those above 60 years will get a guaranteed return of 8 per cent for a period of 10 years. The policy will be launched by Life Insurance Corporation of India (LIC), and is expected to be available from April 1, 2017. Prime Minister Narendra Modi had earlier announced that senior citizens will be able to make an investment of up to Rs 7.5 lakh in the scheme. Back-of-the-envelope calculations show that it would translate to a pension of Rs 5,000 per month. Does it make sense to lock your money at 8 per cent? Experts definitely think so, because interest rates are likely to fall in the near future, and banks are offering an interest rate of just 7 per cent on fixed deposits of 10 years to senior citizens.
“Considering the falling interest rates, it may not be a bad idea for senior citizens; especially those who fall in the lower tax bracket. But as the interest income will be taxable, those who fall in the higher tax bracket can also look at options such as tax-free bonds,” says Anil Rego, CEO & Founder, Right Horizons.
There is an investment limit in the scheme, so that you do not invest all your money in a single instrument. One can combine it with the senior citizen savings scheme, and monthly income plans offered by mutual funds to ensure a regular income. There is no cap on investment in annuity plans of private companies.
The Senior Citizens Savings Scheme (SCSS) is currently offering an interest rate of 8.5 per cent, but the return is subject to revision every quarter, and has a maturity period of five years. If you wish to reinvest after the term is over, you will have to do so at the prevailing market rates.
National Pension System: In another move to encourage people to save more for their retirement, partial withdrawals from National Pension System (NPS) – up to 25 per cent of the contribution made by the employee – have been made tax-free. Moreover, self-employed individuals will now be eligible to claim deduction of up to 20 per cent of their gross total income, as against the existing 10 per cent, in respect of contribution made to NPS. This would be subject to the overall deduction limit of Rs 1.5 lakh.