The big focus in finance minister Arun Jaitley’s budget presented on Feb. 01 appears to be to further the growth agenda for rural and infrastructure development, and push for job creation.
Alongside, the budget has attempted to bring in some relief to the middle-class, boost affordable housing, and promote digitisation in the economy.
Here is what the finance minister has brought in for the ordinary salaried individual.
Jaitley provided some stark numbers: Out of 37 million individuals filing income tax returns in India, 9.9 million reported income of less than Rs2.5 lakh, while 19.5 million reported income of less than Rs5 lakh.
The figures don’t entirely add up, as he explained, when compared to car sales and foreign travel. So, in order to widen the tax net and provide relief to low-income groups post-demonetisation, he has proposed a reduction in the tax rate from 10% to 5% for income between Rs2.5 lakh and Rs5 lakh.
A tax rebate of Rs5,000 is currently allowed for individuals earning income up to Rs5 lakh, i.e. they are allowed deduction of up to Rs5,000 from their tax liability. This rebate is now proposed to be changed to Rs2,500 for income up to Rs3.5 lakh. Therefore, the rebate will no longer be available for income of above Rs3.5 lakh.
Below are the proposed tax slabs:
|Income level||Tax rate|
|Upto Rs2.5 lakh||Nil|
|Rs250,001 to Rs5 lakh||5%|
|Rs500,001 to Rs10 lakh||20%|
|Above Rs10 lakh||30%|
The above proposals will effectively mean that individuals having income up to Rs3 lakh will have no tax to pay. Due to the rate change in the lowest slab, the corresponding effect for the other slabs will be as follows:
- For income between Rs5 lakh and Rs 50 lakh: tax savings of Rs 12,875
At the other end, he has proposed to levy a surcharge of 10% on individuals having income of Rs50 lakh to Rs1 crore. Hence, the effective tax rate for this group will now go up to 33.99% from 30.9% earlier.
It was expected that the finance minister would propose tax breaks to boost the real estate sector, especially post demonetisation, given the government’s objective of “Housing for All” by 2020.
The budget proposes to reduce the holding period of immovable property (land and building) from three years to two years to qualify as a long-term capital asset. Consequently, the corresponding capital gains will be eligible for tax exemptions if the gains are reinvested for specified purposes such as purchasing a house, investing in capital gain bonds, etc.
Currently, the owner of a rented property is allowed certain deductions, including home loan interest, for computing taxable rental income. If the deductions exceed the rent received, the resultant loss can be adjusted against other sources of income, such as salary, thereby lowering the final taxable income. There is no upper limit for this loss adjustment. On the other hand, for properties that are self-occupied, the owner is allowed to claim a deduction of maximum Rs2 lakh for interest on the corresponding home loan.
With the objective of bringing parity between self-occupied and rented properties, the loss adjustment from rented house property is proposed to be restricted to Rs2 lakh per annum. The remaining un-absorbed loss can be carried forward for adjustment in the subsequent eight years. However, such carried-forward loss can only be adjusted against house property income in future years. Hence, effectively, the benefit of loss adjustment gets severely restricted.
Individual tenants who have taken property on rent exceeding Rs50,000 per month will be required to withhold tax at source at 5% from the rent to be paid with effect from June 01, 2017. However, the compliance process has been simplified as no separate registration is required and the tax can be deposited once a year. In effect, the rent received in hand by landlords will now be lower in such cases, and will also be reported to the tax department through the withheld tax deposited by the tenant.
Currently, withdrawal from the National Pension Scheme (NPS)—upon closure of account or upon opting out—is exempt from tax up to 40% of the accumulated balance. NPS now allows for partial withdrawal of contributions made by the subscriber for specified uses, like higher education for children, purchase of a home, marriage, treatment of critical illness, etc. And for such withdrawals, up to 25% of the subscriber’s contribution will be exempt from tax.
To bring parity with salaried employees and to encourage self-employed individuals to subscribe to pension plans, the deduction limit has been increased to 20% of gross total income for contributions made to NPS (up from 10% earlier). However, this will still be subject to the overall deduction limit of Rs1.5 lakh under section 80CCE and Rs50,000 under section 80CCD(1B).
With an eye on easing tax compliance, the government proposes to introduce a simplified one-page tax return form for individuals having taxable income (other than business income) up to Rs5 lakh. It is hoped that the new form will be easy to fill and help such individuals to file their tax returns on their own.
To encourage timely compliance, it is proposed to levy a fee of Rs5,000 for late filing of income-tax returns by Dec. 31 of the assessment year, and Rs10,000 in all other cases. However, for low income earners with income below Rs5 lakh, such a fine would be restricted to Rs1,000.
And to fast track assessments and processing of tax refunds, the budget has proposed to reduce the time limit for completion of scrutiny assessments from 21 months to 18 months for assessment year 2018-19, and thereafter to 12 months for subsequent years. The time limit for filing revised tax returns has also been brought down to one year from the end of the relevant financial year.
Moving to cashless transactions
In order to push for further digitisation, the finance minister has imposed restrictions on cash transactions in excess of Rs3 lakh. Also, cash donations exceeding Rs2,000 to charitable funds/institutions will not be eligible for deduction under section 80G.
On the whole, the budget has not addressed the specific expectations of the salaried class who had hoped for more sops from the finance minister this year.
With inputs from Dipti Shah, assistant manager, PwC India.