Arun Jaitley in his Budget speech stated that the government has made many positive changes in the personal income-tax rates for individuals in the last three years and there would be no changes to the individual income-tax rates. Based on data of tax paid for financial year 2015-16, Jaitley called out salaried taxpayers as the high tax paying section and stated that major portion of personal-income tax collection comes from the salaried class and no major relief has been proposed for the salaried class. For example, there have been no changes proposed to the maximum amount of deduction available under section 80C of the Income Tax (IT) Act. Section 80C of the IT Act provides deduction from total income for investments in specified instruments like provident funds, public provident funds, national savings certificate, fixed deposits, life insurance premium payments, tuition fees and others up to `1.5 lakh.
A standard deduction of `40,000 has been proposed to be introduced for salaried individuals in this year’s Budget. About 2.5 crore salaried employees and pensioners would benefit from this proposal and it would cost the government around `8,000 crore, according to Jaitley. According to Budget proposals, salaried individuals will get a standard deduction of `40,000 on income in place of the present exemption allowed for transport allowance and reimbursement of miscellaneous medical expenses. Standard deduction allows for a flat deduction from income of a salaried individual towards expenses an employee would incur in relation to his or her employment. Standard deduction, which was earlier available to the salaried individuals on their taxable income, was abolished with effect from assessment year 2006-07.
Budget 2018 has also announced a new tax of 10% on long-term gains from investing in stock markets and equity mutual funds. Under the proposed new tax, profits of more than `1 lakh from stock and equity mutual fund investments held over one year will be taxed at 10%. At present, profits from stock and equity mutual fund investments held for more than 12 months are tax exempt. However, long-terms capital gains made on investments up to January 31, 2018, will not be taxed.
For senior citizens, the government has announced a number of measures that will to help ease their tax burden. Exemption of interest income on deposits with banks and post offices is to be increased from `10,000 to `50,000, hike in deduction limit for health insurance premium and/or medical expenditure from `30,000 to `50,000 under section 80D and TDS not required to be deducted under section 194A have also been envisioned.
Most of the taxpayers, especially high income earners and investors in stocks and mutual funds were highly disappointed about the tax proposals. Most of them have opined that it has hiked the cess on tax from 3% to 4% for all taxpayers, a step that will add to the burden of high-income taxpayers. Vijay Chhangani, Senior Manager, Indirect Tax, Ernst & Young LLP said, “There are some special amendments in the Customs Act, which is welcome step. On the contrary, another cess of 1% over and above the existing levy has been added to fund education and health care expenses. The net impact taking into account the reintroduction of standard deduction will increase the tax burden in higher slabs. At the same time, increase of cess from 1% to 10% on import duty will have a cascading effect on cost of imported goods.”
A lot of taxpayers were hoping that the Budget will raise the basic exemption limits to `3 lakh for general taxpayers and to `5 lakh for senior citizens. Some had even hoped for a widening of the tax slabs and a higher tax savings limit under Section 80C. However, as many tax experts pointed out last week, these measures would have burned a big hole in the exchequer. Instead of major changes in the tax structure, Jaitley has done some tinkering by reintroducing a standard deduction of `40,000 for salaried taxpayers. Experts say if these allowances are removed, the standard deduction will have a limited impact on the tax outgo. Alok Agrawal, Senior Director, Deloitte India said, “The standard deduction of `40,000 for salaried individuals is a nominal benefit because medical reimbursements and transport allowance were anyway leading to `34,200 as tax-free salary.”
Another major expectation was a change in the tax treatment of the NPS corpus. Right now, 40% of the NPS maturity corpus can be withdrawn tax free, 40% has to be put in an annuity plan to earn a monthly pension and 20% is taxable. This 20% can escape tax if put in an annuity. But it eventually gets taxed because the pension is fully taxable. Pension from the annuity is a mix of the principal and the gain, so the investor effectively pays tax not only on the gains but also on the invested capital.
The Budget has fluttered the stock market, sending it on a downward spiral. Experts opined that market has accepted 10% tax on Long Term Capital Gains (LTCG) because of the grandfathering of gains till January 2018. Sitaram Sharma, President, Bharat Chamber of Commerce said, “The increase of custom duty and cess from 3% to 10% will hugely impact the cost of imports. In the LTCG front, the proposal for introduction of tax at 10% on equity is a derogatory step for the share market without removal of STT. However, the grandfathering clause is a welcome measure.”
Providing an overview of the Budget, N G Khaitan, Vice-President of the chamber and Senior Partner, Khaitan Co. stated, “The need of the hour is to support the domestic consumption by increasing disposable income of the tax payers. Imposition of 10% tax would affect the mutual fund industry which acts as an important player in the equity market.”
On the other hand, at a symposium organised by Bharat Chamber of Commerce on the Union Budget 2018-19, Nirmal Poddar, Senior Advocate, Supreme Court of India and an eminent taxation expert observed that the LTCG Tax has been imposed with an objective to meet a portion of the revenue deficit of the Budget proposal.
The biggest disappointment is that a sharp dip in stock prices could make new investors jittery. Small investors have taken to mutual funds in a big way in recent years, adding over two crore new folios in the past two years (70 lakh in 2016 and 1.4 crore in 2017). Nearly `1,50,000 crore has flown into the equity markets through mutual funds in the past one year. Investors are pouring in nearly `6,200 crore every month into equity funds via SIPs. This liquidity has helped the markets climb. The other danger is that investors will be lured by distributors of other products such as ULIPs and traditional insurance policies. Being insurance products, the income from these plans are not taxable under Section 10(10d). ULIPs have changed for the better after the insurance regulator capped charges in 2010, but traditional insurance plans continue to have very high charges. Their returns are barely 4-5%, but if stock markets are down and LTCG are taxed, insurance agents will be able to palm off these plans to investors.