By the time the 103-minute speech ended, a lot of individual tax payers’ expectations weredashed. While only the ultra optimistic expected the finance minister P. Chidambaram to lower the basic tax rate, there were many who were quite sure that the income tax surcharge would go and there would be a substantial hike in the basic tax exemption.
Guess what? Your effective income tax rates are actually going to go up thanks to the education cess being raised from 2% to 3%. And don’t say we didn’t warn you—Mint actually predicted this likely hike in a front-page story on 19 February.
Anyway, we looked into the fine print of the Budget so you aren’t just going by what will happen to your stocks and mutual funds—hopefully they didn’t fall as much as the Sensex did—before and after the Budget was presented. And it isn’t a total write-off in terms of personal taxes and your pocket book. Here is our quick guide to how much money Chidambaram has put in your pocket and how much he’s taking out.
If you are a senior citizen
The National Housing Bank will introduce a new product, called a Reverse Mortgage, just for you. A reverse mortgage, which works in exactly the opposite way to a housing loan, lets senior citizens get a loan against the property. The loan will be due when the home owner dies, and the loan amount will typically not exceed the selling price of the house. This kind of mortgage, fairly common in the US and in Europe, will provide liquidity to retirees and those with fixed incomes. Also, the deduction allowed for payment towards medical insurance premium has been increased by a third to Rs20,000 for senior citizens. The finance minister said he has directed the three general insurance companies to provide health insurance for the elderly, which is now provided only by National Insurance Company.
If you are an employee
The basic exemption limit is increased by Rs10,000 for all, resulting in a tax saving of Rs1,000. For individuals, the tax applies only if the income exceeds Rs1.1 lakh, and for senior citizens and women, it applies only from Rs1.95 lakh and Rs1.45 lakh respectively.
But before you get too excited, remember that pesky little thing called the education cess? A back-of-the-envelope calculation shows that an individual earning Rs500,000 with a tax bill of Rs1.02 lakh will end up paying Rs99,910, quite a small saving.
Separately, the government has brought Employees’ Stock Option Scheme (ESOPs) which is an allocation of equity shares in your company by your employer, under the Fringe Benefit Tax (FBT). Basically, if a company sells a share worth Rs100 to its employees for Rs50, the difference is treated as perk. If the employee sells the share in the market for Rs120, the profit of Rs70 (Rs120 less Rs50) is treated as capital gain.
Now, there would not be any tax on employees for perquisites, but company has to pay FBT of around 6.798% and capital gains tax will apply. With the minimum tax rate of 10%, it will benefit the employees, as there would not be any tax on perks.
“Applying FBT on ESOPs is an undesirable move at a time when there is a dearth of quality manpower in almost all sectors,” says Deepak M. Satwalekar, MD & CEO of HDFC Standard Life Insurance. The move is likely to have an impact on the next hot IT company you are looking to join for its soaring stock. “The finance minister has actually made employers give a second thought” to offering ESOPs to employees, say Divya Baweja and Abhinav Jain of BMR & Associates.
As for pension contributions, the finance minister has now permitted all employees to claim deduction on their pension contribution subject to an overall limit of Rs1 lakh per annum. Previously, only government employees were allowed this deduction subject to a maximum of 10% of their income. However, deduction for pension contribution is within the overall limit of Rs 1 lakh available under Section 80C, which includes contribution to provident fund and life insurance premium.
In another change, the limit to claim deduction for insurance premium paid is now increased by half to Rs15,000 per annum. Again, relatively small breaks for those trying to save up for a happy retirement.
If you have loads of money
Well, simply put, you are in trouble. The budget has doubled the dividend distribution tax to 25% for dividends given out by money market and liquid mutual funds, where the wealthy often park their money. This is the tax deducted by the companies before they pay dividends to shareholders.
“This is a very steep increase in tax,” says V Ranganathan, taxation expert and senior partner at Ernst and Young. “This will move the high net worth individual’s money to the banking sector.” Maybe, though bank deposits, while safer, tend to generate somewhat boring returns.
In a bid to allow small investors to gain access to capital gains bonds issued under Section 54EC, the government has retrospectively put a limit on investment of Rs50 lakh per investor. Under this section, if someone has received capital gain from the sale of any asset, he need not pay tax on the amount invested in capital gains bonds. So if you had capital gains over Rs50 lakh, then you can’t avoid paying tax on them by parking them in capital gains bonds.
And, if you were itching to spend some of that extra money on a private jet, you should have acted by now. The FM has decided that private aircraft, including helicopters, will become a little bit more expensive, thanks to a new import duty of 3%, as well as other duties such as countervailing and additional custom duties.
Collectors who buy and sell works of art will have to pay capital gains tax beginning in April 2008.
Until now, art was treated as “personal effects,” but the 2007-2008 Union Budget has brought drawings, paintings, sculptures and even archaeological collections under the scope of capital assets. This means works of art will be held on a par with other tangible assets such as real estate or jewelry.
For example, a painting bought for Rs10 lakh and sold three years later for Rs20 lakh would be subject to 22.6% tax of the appreciation, or Rs2.26 lakh. Short-term sales, a period under three years, are subject to 33.99% tax.
If you are an investor
The main change for investors is the increase in dividend distribution tax to 15% from 12.5%. Investors will lose a minimum of Rs2.50 for every Rs100 in dividends declared by the companies. However, the dividend income is not taxed in the hands of the investors.
One piece of good news: The basket of investments available is likely to widen. Mutual funds would now be allowed to float dedicated infrastructure funds and allow individuals to invest overseas through the mutual funds. This will help individuals to invest abroad via such funds and help them diversify their portfolio and risk. In addition, the government is also evaluating issue of tax-free bonds for developing urban infrastructure by local bodies. However, further details of this scheme are not known.
Haven’t kicked smoking yet
Every government’s favourite target, cigarette smokers, are in for it again. The excise duty on cigarettes has been revised upward. A company which was earlier paying Rs160 as duty, will now pay Rs168 for non-filter cigarettes (size not exceeding 60mm). What this means is that you may end up paying about Rs3-5 more per pack of 20 such as Wills Classic, which costs Rs70 now. If you smoke while you take your dog out for a walk, then you can rejoice a bit. Chidambaram has proposed a 10% reduction in customs duty on pet food.
Finally, there is some relief on all the money you spend on quality education for your children. Until now, only students could claim a tax deduction on the repayment of interest on student loans. Now, Section 80 E has been amended so parents can claim a deduction against their income for repayment of interest on loans. As can spouses.
There you have it. Not much of a “people’s budget” as the finance minister said in his speech.
Maitreyee Handique contributed to this story.
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