ET BureauSome ideas suggested by ET Wealth in earlier issues for the Finance Minister’s team to consider in the draft Budget proposal found their way into the Finance Bill. However, some suggestions, which would have simplified matters for the common taxpayer, were ignored.
Hits
1. Change in NPS tax rules: We suggested EEE (tax exemption at the time of investment, accrual and withdrawal) status for the New Pension Scheme (NPS) to bring parity between all pension products. Although NPS will still be treated as EET, 40% of the maturity at withdrawal has been made tax-free. This is a colossal shift as earlier 60% of the corpus at withdrawal was taxable, while the mandatory 40% contributed towards buying annuity was tax-free.
Now, of the 60% withdrawn, you’ll have to pay tax on only 20%. That 20% too can be tax-free if you buy an annuity with it. The monthly pension from annuity contributions, however, will be taxed at slab rate. NPS is now more attractive than other insurance pension plans, where only 33% of the maturity corpus is tax-free.
Also, NPS provides the flexibility to switch among six pension fund managers appointed by PFRDA. The fund management costs are lower too. The Finance Minister, as suggested by the Kelkar Committee, has also levelled the playing field between NPS and EPF by changing the taxability status of EPF from EEE to EET. However, NPS gives you an equity edge and has higher chances of earning better returns in the long-run than EPF.
2. Higher deduction for those without HRA: A yearly limit of Rs 24,000 as exemption under Section 80GG for rent paid made little sense. At today’s rates, it is near impossible to rent a house at Rs 2,000 per month even in a tier-II city. Also, while salaried individuals who get HRA as part of their compensation could claim big deductions, a self-employed person could claim only up to Rs 24,000 a year. This was unfair for all those who do not earn a structured salary.
In our Budget suggestions, Bhuwana Shreeram, Head, Financial Freedom Golden Practices, had suggested raising this limit to Rs 1 lakh a year. Although the Finance Minister has chosen to raise it to only Rs 60,000 a year—Rs 5,000 a month—the jump could cut your tax bill by Rs 10,800 a year.
3. More for housing: At current interest rates of 10-10.5%, if one borrows as little as Rs 20 lakh, one crosses the Rs 2 lakh deduction limit allowed as interest paid on home loan. At the same time, the average price for a 800-1,000 sqft home is more than Rs 50 lakh in most cities. This means for 16 years of a 20-year loan term, borrowers are paying more than the deduction limit.
ET Wealth had suggested a revision. The good news is that the Finance Minister has announced an additional deduction of Rs 50,000 under Sec 80EE. However, this benefit is limited for first-time home buyers with loans up to Rs 35 lakh where the cost of the house is less than Rs 50 lakh. The change makes buying a property lucrative for endusers— a move suggested by ET Wealth.
4. Extend home loan deadline: Construction delays by builders is a double whammy for buyers who not only have to pay higher interest when the loan term gets extended but also risk losing tax benefits. The Rs 2 lakh deduction under Section 24 on home loan interest payment is available only if you get possession within three years of borrowing. If these terms are not met, the benefit gets reduced to Rs 30,000 only.
Archit Gupta, CEO and Founder, ClearTax.in, had said in our earlier issue that “it is unfair to penalise homebuyers for the builder’s fault”. We suggested that the benefit should not be time-bound if the delay was from the builder’s end. The FM, however, has decided to extend the deadline instead. From 2016-17 onwards, the deadline has been increased from 3 to 5 years. Considering the average delays are usually of 1-2 years, this will be a huge relief for homebuyers.
5. Tax rules for startups: The Long Term Capital Gains (LTCG) Tax has been a huge sore point for startups. While investments in listed companies do not attract capital gains tax after a holding period of 1 year, for unlisted companies (including startups) the minimum holding period for avoiding LTCG tax was three years.
Investors had to pay a 20% tax on gains if they existed before. Ankur Mittal, Co-founder, Kidology, had pointed out how this clause hits angel investors and therefore cashstrapped startups. The Budget has brought good news. The holding period has been reduced from three to two years to avail of benefits of long-term capital gain regime in case of unlisted companies.
Misses
1. No increase in basic exemption: Apart from a small additional tax rebate of Rs 3,000 under Section 87A, there was no change in basic exemptions. This was a bit of a disappointment as the last hike was two years ago. The tax slabs also remained unchanged. A long-standing demand has been segregation of the overcrowded Section 80C. The Rs 1.5 lakh limit under the section is shared by too many asset classes. While investment in NPS was given an additional Rs 50,000 deduction last year, the ceiling remains unchanged at Rs 1.5 lakh for other investments.
2. No easing of TDS rules: Senior citizens like Praveen Shroff, the chunk of whose income is from interest, had hoped the Budget would take note of the Easwar Committee recommendations and ease TDS rules. However, the suggestion to reduce TDS on interest income from 10% to 5% did not find its way into the Finance Bill. This hurts senior citizens most because their income is mostly from interest on deposits. The younger taxpayers can rejig investments or submit Form 15G, but for senior citizens, this is a hassle they can do without.
Although tax liabilities of senior citizens are miniscule, banks deduct a flat 10% TDS on earnings of deposits. The option to file Form 15G or 15H is only open if the final tax liability on the taxpayer’s total income is zero. Many senior citizen do not fulfil this criteria and have to wait months for refunds.
3. RGESS not revamped: The scheme designed to attract small investors towards equity has collected only Rs100 crore in three years. Restrictions like deductions available only for ‘first-time’ retail investors with an annual income of not more than Rs 12 lakh that too only on 50% of the invested amount, up to Rs 50,000, have kept many away. ET Wealth had suggested broadening the tax scope of the scheme to make it attractive for the masses.
4. No parity in pension space: While NPS has been getting bagful of benefits, other pension plans have not received anything. In fact, the Finance Minister has decided to levy tax on 60% of the EPF corpus on withdrawal. The service tax reduction in annuity products from 3.5 to 1.5% would not make much of a difference.
5. No widening of tax net: The Economic Survey 2015-16 proposed widening the tax net from 5.5% of earning individuals to over 20%, by taxing rich farmers, income from property and plugging of tax leaks. The government has instead opted for taxing the super-rich.
The Finance Minister has increased the surcharge on income above Rs 1 crore from 12% to 15%. This means the super-rich would pay approximately 1% more income tax as their effective tax rate increases from 34.6% to 35.6%. For someone earning Rs1 crore per annum, this would result in an additional cash outflow of approximately Rs 1 lakh per annum. There is also tax on dividend income at 10%, where the annual dividend exceeds Rs 10 lakh.
Hits
1. Change in NPS tax rules: We suggested EEE (tax exemption at the time of investment, accrual and withdrawal) status for the New Pension Scheme (NPS) to bring parity between all pension products. Although NPS will still be treated as EET, 40% of the maturity at withdrawal has been made tax-free. This is a colossal shift as earlier 60% of the corpus at withdrawal was taxable, while the mandatory 40% contributed towards buying annuity was tax-free.
Now, of the 60% withdrawn, you’ll have to pay tax on only 20%. That 20% too can be tax-free if you buy an annuity with it. The monthly pension from annuity contributions, however, will be taxed at slab rate. NPS is now more attractive than other insurance pension plans, where only 33% of the maturity corpus is tax-free.
Also, NPS provides the flexibility to switch among six pension fund managers appointed by PFRDA. The fund management costs are lower too. The Finance Minister, as suggested by the Kelkar Committee, has also levelled the playing field between NPS and EPF by changing the taxability status of EPF from EEE to EET. However, NPS gives you an equity edge and has higher chances of earning better returns in the long-run than EPF.
2. Higher deduction for those without HRA: A yearly limit of Rs 24,000 as exemption under Section 80GG for rent paid made little sense. At today’s rates, it is near impossible to rent a house at Rs 2,000 per month even in a tier-II city. Also, while salaried individuals who get HRA as part of their compensation could claim big deductions, a self-employed person could claim only up to Rs 24,000 a year. This was unfair for all those who do not earn a structured salary.
In our Budget suggestions, Bhuwana Shreeram, Head, Financial Freedom Golden Practices, had suggested raising this limit to Rs 1 lakh a year. Although the Finance Minister has chosen to raise it to only Rs 60,000 a year—Rs 5,000 a month—the jump could cut your tax bill by Rs 10,800 a year.
3. More for housing: At current interest rates of 10-10.5%, if one borrows as little as Rs 20 lakh, one crosses the Rs 2 lakh deduction limit allowed as interest paid on home loan. At the same time, the average price for a 800-1,000 sqft home is more than Rs 50 lakh in most cities. This means for 16 years of a 20-year loan term, borrowers are paying more than the deduction limit.
ET Wealth had suggested a revision. The good news is that the Finance Minister has announced an additional deduction of Rs 50,000 under Sec 80EE. However, this benefit is limited for first-time home buyers with loans up to Rs 35 lakh where the cost of the house is less than Rs 50 lakh. The change makes buying a property lucrative for endusers— a move suggested by ET Wealth.
4. Extend home loan deadline: Construction delays by builders is a double whammy for buyers who not only have to pay higher interest when the loan term gets extended but also risk losing tax benefits. The Rs 2 lakh deduction under Section 24 on home loan interest payment is available only if you get possession within three years of borrowing. If these terms are not met, the benefit gets reduced to Rs 30,000 only.
Archit Gupta, CEO and Founder, ClearTax.in, had said in our earlier issue that “it is unfair to penalise homebuyers for the builder’s fault”. We suggested that the benefit should not be time-bound if the delay was from the builder’s end. The FM, however, has decided to extend the deadline instead. From 2016-17 onwards, the deadline has been increased from 3 to 5 years. Considering the average delays are usually of 1-2 years, this will be a huge relief for homebuyers.
5. Tax rules for startups: The Long Term Capital Gains (LTCG) Tax has been a huge sore point for startups. While investments in listed companies do not attract capital gains tax after a holding period of 1 year, for unlisted companies (including startups) the minimum holding period for avoiding LTCG tax was three years.
Investors had to pay a 20% tax on gains if they existed before. Ankur Mittal, Co-founder, Kidology, had pointed out how this clause hits angel investors and therefore cashstrapped startups. The Budget has brought good news. The holding period has been reduced from three to two years to avail of benefits of long-term capital gain regime in case of unlisted companies.
Misses
1. No increase in basic exemption: Apart from a small additional tax rebate of Rs 3,000 under Section 87A, there was no change in basic exemptions. This was a bit of a disappointment as the last hike was two years ago. The tax slabs also remained unchanged. A long-standing demand has been segregation of the overcrowded Section 80C. The Rs 1.5 lakh limit under the section is shared by too many asset classes. While investment in NPS was given an additional Rs 50,000 deduction last year, the ceiling remains unchanged at Rs 1.5 lakh for other investments.
2. No easing of TDS rules: Senior citizens like Praveen Shroff, the chunk of whose income is from interest, had hoped the Budget would take note of the Easwar Committee recommendations and ease TDS rules. However, the suggestion to reduce TDS on interest income from 10% to 5% did not find its way into the Finance Bill. This hurts senior citizens most because their income is mostly from interest on deposits. The younger taxpayers can rejig investments or submit Form 15G, but for senior citizens, this is a hassle they can do without.
Although tax liabilities of senior citizens are miniscule, banks deduct a flat 10% TDS on earnings of deposits. The option to file Form 15G or 15H is only open if the final tax liability on the taxpayer’s total income is zero. Many senior citizen do not fulfil this criteria and have to wait months for refunds.
3. RGESS not revamped: The scheme designed to attract small investors towards equity has collected only Rs100 crore in three years. Restrictions like deductions available only for ‘first-time’ retail investors with an annual income of not more than Rs 12 lakh that too only on 50% of the invested amount, up to Rs 50,000, have kept many away. ET Wealth had suggested broadening the tax scope of the scheme to make it attractive for the masses.
4. No parity in pension space: While NPS has been getting bagful of benefits, other pension plans have not received anything. In fact, the Finance Minister has decided to levy tax on 60% of the EPF corpus on withdrawal. The service tax reduction in annuity products from 3.5 to 1.5% would not make much of a difference.
5. No widening of tax net: The Economic Survey 2015-16 proposed widening the tax net from 5.5% of earning individuals to over 20%, by taxing rich farmers, income from property and plugging of tax leaks. The government has instead opted for taxing the super-rich.
The Finance Minister has increased the surcharge on income above Rs 1 crore from 12% to 15%. This means the super-rich would pay approximately 1% more income tax as their effective tax rate increases from 34.6% to 35.6%. For someone earning Rs1 crore per annum, this would result in an additional cash outflow of approximately Rs 1 lakh per annum. There is also tax on dividend income at 10%, where the annual dividend exceeds Rs 10 lakh.
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