India’s finance minister Arun Jaitley presented a budget focused on the farm sector on Feb. 29. While that was essential for keeping the economy’s growth engines chugging along, most of India’s salaried class only has one question: Do I pay more taxes?
While the budget did not have any major tax breaks or reforms, there were some small tweaks and additions to existing tax policies. Here are the key changes that you should know:
Rebate for small tax payers: An individual, whose total income does not exceed Rs5 lakh will now be eligible for a tax rebate up to Rs5,000 (this limit has been increased from the earlier rebate of Rs2,000).
Deduction in respect of house rent: In the case of a resident individual who does not receive house rent allowance (HRA) but actually incurs rental expense, the budget proposes to increase the deduction allowable to Rs5,000 per month from the existing limit of Rs2,000 per month.
Home loan interest: A deduction of Rs50,000 will be available for first time home buyers, provided the cost of the house does not exceed Rs50 lakh and the loan availed does not exceed Rs35 lakh.
This deduction is in addition to the deduction available towards interest paid on self-occupied property of Rs2 lakh and will be available from financial year 2016-17 onwards.
In order to be eligible to avail this deduction, the construction of the house property was to be completed within three years from the end of the financial year in which the loan was availed. Given that construction of housing projects generally takes longer to complete, the three year period is proposed to be extended to five years.
The finance minister has provided impetus to the National Pension Scheme (NPS) by making the NPS more tax efficient while simultaneously restricting tax breaks which were earlier provided to recognised provident funds (RPF)/superannuation funds.
- The exemption in respect of employer contributions towards approved superannuation funds has been increased from Rs1 lakh to Rs1.5 lakh
- Exemption in respect of employer contribution towards provident fund has been capped at Rs1.5 lakh per annum. In the past, employer contributions up to 12% of salary were exempt
- Withdrawal from NPS, RPF and superannuation will be exempt up to 40% of the corpus at the time of retirement
- Portability of accumulated funds from RPF/superannuation to NPS has been provided for without any taxation
By bringing in RPF and superannuation funds to taxation at the time of withdrawal, the finance minister has brought in parity in the taxation of these funds with the taxation of NPS.
Increase in levy of surcharge: A surcharge of 12% was applicable to individuals earning more than Rs1 crore. Through the Finance Bill 2016, this surcharge rate has been increased to 15%. Accordingly, the maximum marginal rate—i.e. rate of tax, including surcharge—for individuals earning above Rs1 crore will now be approximately 35.54% from the earlier 34.61%.
Dividends now taxable in certain cases: Income by way of dividends earned by individuals in excess of Rs10 lakh per annum will be taxable at the rate of 10%. Further, no deductions of any expenditure incurred/set off of losses shall be allowed against such dividend income. The tax payable by the individual is in addition to the dividend distribution tax paid by the company.
Tax collected at source (TCS) on certain transactions: It has been proposed that with effect from June 1, 2016, the seller of motor vehicles has to collect tax at source at 1% if the sale value of the vehicle exceeds Rs10 lakh.