Anand Kalyanaraman
Parvatha Vardhini C
There were hopes that with the Lok Sabha election round the corner, Budget 2019 — despite being an interim one — would provide some big tax breaks to individual taxpayers. Prior to the Budget, there was talk of possible increase in income exemption limits, higher deduction limit under Section 80C and higher tax deduction on home loan interest.
It was way back in Budget 2014 that major tax benefits across-the-board were given — with a uniform ₹50,000 bump-up, income exemption limit was increased to ₹2.5 lakh (₹3 lakh for senior citizens), deduction limit under Section 80C was hiked to ₹1.5 lakh and tax deduction on home loan interest on self-occupied property was hiked to ₹2 lakh. In the next four Budgets, there were mainly tweaks such as increase in deduction on health insurance premiums, reduction in slab rate to 5 per cent for incomes between ₹2.5 lakh and ₹5 lakh, an additional ₹50,000 tax break on NPS investment, and introduction of standard deduction of ₹40,000 on salary in lieu of medical reimbursement and transport allowance (together ₹34,200).
Budget 2019 has provided some sweeteners for the aam-aadmi taxpayer, but the tax breaks are far less than what was expected. Two key changes will reduce the tax outgo for the common man.
Hike in standard deduction on salary
One, the standard deduction from salary income has been raised from ₹40,000 to ₹50,000 a year. This ₹10,000 increase will reduce taxable income from salary and benefit all salaried taxpayers, including pensioners. The benefit will mean lesser tax (including 4 per cent cess) of ₹2,080 for those in the 20 per cent tax slab and ₹3,120 for those in the 30 per cent tax slab.
Tax rebate
Next, the Budget, while not changing tax slabs or tax rates, has given full tax rebate under Section 87A to individuals having annual taxable income of up to ₹5 lakh — this means that such taxpayers will not pay any income tax. This rebate translates into lower tax (including cess) of up to ₹13,000 for those with taxable income up to ₹5 lakh. At present, a rebate of ₹2,500 is allowed for those with taxable income up to ₹3.5 lakh (as per Budget 2017). The Budget 2019 has increased both the eligibility to claim the rebate amount (taxable income up to ₹5 lakh) and the rebate amount (up to ₹12,500).
The biggest benefit under this enhanced rebate provision is for those whose taxable income is more than ₹3.5 lakh and up to ₹5 lakh. For example, at present, an individual with taxable income of ₹3.5 lakh pays ₹2,600 tax (including cess), thanks to the existing rebate, while those with taxable incomes of ₹4 lakh and ₹5 lakh pay tax of ₹7,800 and ₹13,000 respectively (including cess) without rebate. With the full tax rebate proposed under Budget 2019, the one with taxable income of ₹3.5 lakh saves ₹2,600 while those with taxable incomes of ₹4 lakh and ₹5 lakh save ₹7,800 and ₹13,000 respectively.
Note that the rebate benefit under Budget 2019 does not apply to those whose taxable income exceeds ₹5 lakh. So, for instance, if the taxable income is ₹6 lakh, there is no rebate on income up to ₹5 lakh. The tax liability has to be calculated, without rebate benefit, on the entire ₹6 lakh as per the tax slabs — nil up to ₹2.5 lakh, 5 per cent on income between ₹2.5 lakh and ₹5 lakh; 20 per cent on income between ₹5 lakh and ₹10 lakh and 30 per cent on income over ₹10 lakh. As usual, cess of 4 per cent on tax will also apply.
How can taxpayers with earnings higher than Rs 5 lakh get the rebate benefit and avoid paying tax? To the extent possible, they should make use of tax breaks and try to bring their taxable income to ₹5 lakh or below. For instance, say a taxpayer’s gross income after revised standard deduction of ₹50,000 is ₹7.5 lakh. If he invests ₹1.5 lakh in Section 80C instruments; ₹50,000 in the National Pension Scheme (NPS) and pays health insurance premium of ₹25,000 for himself and ₹25,000 for his parents, the taxable income comes down to ₹5 lakh. He then becomes eligible for the rebate benefit under Budget 2019 and ends up paying no tax. Other expenses that can reduce taxable income include interest on home loan (up to ₹2 lakh), interest on education loans and donations eligible for tax deductions.
TDS threshold hike
While the above changes reduce the tax outgo for some taxpayers, Budget 2019 has also provided some procedural relief by hiking some threshold limits for tax deduction at source (TDS). One, the limit for TDS on bank deposits and post-office deposits has been increased from ₹10,000 to ₹40,000 a year. Senior citizens had got the benefit of a higher TDS limit on interest income in Budget 2018 itself when it was moved up from ₹10,000 to ₹50,000. Next, as per Budget 2019, if you have given out your land, building, machinery or furniture on rent to, say, business establishments, TDS will be deducted by them on the rent paid only if such rent exceeds ₹2. 4 lakh a year. Earlier, TDS was to be deducted by your tenants if the rent exceeded ₹1.8 lakh a year.
For small taxpayers, these changes will remove the hassle of their being subjected to TDS, only to be entitled to a refund later on. It also prevents the taxpayer’s money from being unnecessarily locked up in the department’s hands before obtaining a refund, a few months after filing one’s return.
Over the years, the compulsory triggering of TDS provisions on payments as low as ₹2,500 (withdrawals on NSS deposits) or ₹10,000 (interest on bank deposits) has meant that small investors whose income did not fall within the taxable limit, or whose rate of tax was lower than the TDS rate, had to remember to submit Form 15G or 15H to the institution deducting taxes or obtain a certificate or lower or NIL tax deduction from the tax department. If they did not do so, they would have to file their returns and wait for the refund of TDS.
While the TDS threshold limit has been raised in the above two cases in Budget 2019, the rate of TDS remains unchanged. Bank and post-office deposits will continue to charge TDS at the rate of 10 per cent.
The TDS rate on rentals stands at 2 per cent for machinery or equipment and 10 per cent for land, building or furniture. Also, there is no change in the requirement for deduction of tax at 5 per cent when the rent paid by an individual or HUF exceeds ₹50,000 a month (introduced in Budget 2017). The Budget 2019 change on TDS on rent is only for business or professional establishments or any person other than individuals or HUFs that pay rent.
Besides, the hike in the TDS limit on interest is not applicable for deposits with corporates or other finance companies. TDS on these deposits will continue if the interest earned exceeds ₹5,000 a year. Note that even if tax is not deducted by the interest-payer or rent-payer due to hike in TDS thresholds, it does not mean that the income is exempt from tax. You still have to declare the income and pay tax if the taxable income exceeds the threshold. In such cases, you will also have keep track of advance tax payment liabilities, if any.
Few giveaways for investors in Modi’s budgets
However, some changes have rationalised the taxation system
Lokeshwarri S K
As the term of the Modi-led NDA government draws to a close, and with the final budget of the government behind us, it makes sense to take a look at the fiscal policies of the government and their impact on investors.
On perusal of the 5 full budgets and one interim budget of this government, few facts become apparent.
One, the government has not really doled out sops mindlessly to investors. There has been minor tinkering with the income tax, TDS and tax rules for home-owners in the Interim Budget, but that cannot be termed as a largesse. Other tweaks to income tax slabs and rates and 80C limits in 2014 and 2017 Budgets are also not much to write home about.
Two, there has been a long-term vision in some of the changes in long term capital gains tax which, while hurting investors, has rationalised the taxation system.
Three, given the Centre’s obsession with the fiscal deficit number, giveaways have been few and far between for both investors and corporates alike. Four, the focus on improving social security through promoting retirement savings, has been another hallmark of the NDA Government.
Rationalisation of taxes
The budgets presented by the Modi government have not been too favourable to investors, in general. In the first Budget presented in July 2014, Arun Jaitley brought down the axe on debt mutual funds, increasing the minimum holding period to qualify for LTCG tax to 36 months from 12 months.
The move was aimed at removing the tax advantage enjoyed by debt mutual funds when compared to bank fixed deposits. Earlier, gains on debt funds held for more than 12 months could be taxed at 10 per cent (without indexation) or at 20 per cent (with indexation benefit); Budget 2014 limited this to 20 per cent tax with indexation.
Not content with this, Jaitley came down hard on equity investors too in Budget 2018. It was felt that exempting gains of equity and equity funds held for more than a year gave them an unfair advantage over other investment classes. From April 1, 2018, listed equity shares, units in equity-oriented mutual funds and equity fund-of-funds sold after one year of purchase were made liable to LTCG tax of 10 per cent on gains in excess of ₹1 lakh.
To bring parity between those opting for growth and dividend options, dividends from equity funds were also made taxable at 10 per cent. The transition was, however, smoothly managed by grandfathering the gains made prior to January 31, 2018. The grandfathering clause helped avert a sell-off in equity market.
The Centre has, however, been encouraging savings towards retirement, by providing many sops to investors parking their money in National Pension Scheme (NPS) Tier I. Budget 2015 provided an extra tax break of ₹50,000 a year. Budget 2016 allowed tax-free withdrawal of 40 per cent of corpus on maturity.
Budget 2017 exempted partial withdrawals from tax. In December 2018,the government announced tax exemption for the entire 60 per cent allowed to be withdrawn at maturity; but Budget 2019 does not seem to have formalised this yet.
Investor response to this scheme, however, has been indifferent so far, due to the requirement to use 40 per cent of the final corpus to buy an annuity.
Not much for India Inc.
As far as India Inc. is concerned, the gradual reduction in corporate tax was mainly beneficial to smaller companies. Rate of corporate tax was reduced from 30 per cent to 25 per cent only for companies with turnover of less than ₹250 crore. While this move has been beneficial to small and medium enterprises, listed companies have not really benefitted. Effective tax rate of companies in the BSE 500 in FY18 was 29 per cent, slightly higher than the 28 per cent rate in FY17.
While the government’s spends on infrastructure were expected to translate into better order flows for capital goods and construction companies, this did not really materialise due to stalling of projects on account of regulatory issues, delayed execution by government arms, and so on. Also, the fact that a chunk of announcements on infrastructure spends financed through extra budgetary financing has also not been conducive for India companies.
With the merger of the commodity market regulator, Forward Markets Commission, with the Securities and Exchange Board of India, announced in the 2015 Budget, commodity derivatives got a fresh lease of life.
Commodity derivatives and BEPS
The move helped restore the credibility of the commodity market, following the NSEL scam. SEBI got down to the task with gusto, revamping all the rules governing commodity exchanges, introducing new products and trying to improve participation.
The Modi-led government has also been serious about checking tax evasion and round-tripping of money through the stock market. India was one of the first countries to implement the OECD’s Base Erosion and Profit Shifting (BEPS) plan into action through a series of proposals in Budget 2016-17. The 15-point action plan put out by OECD sought cooperation of all nations to arrest corporate profits from disappearing or artificially shifting to low or no-tax countries. Adoption of these rules impacted foreign companies doing business in India as well as Indian multinational companies that have overseas subsidiaries. Foreign portfolio and direct investors also came under higher scrutiny.