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Putting income tax pieces together for a better whole

Government made a few changes to personal income tax provisions in 2014 to boost flagging household savings

The year held some cheer for tax payers. Besides other announcements in the budget, the government made a few changes to personal income tax provisions in order to boost flagging household savings. While a few amendments were made to increase the overall tax benefit, the government also plugged some tax loopholes.

Income heads

The basic tax exemption limit was raised from 2 lakh to 2.5 lakh. The exemption limit under section 80C was also raised by 50,000 to 1.5 lakh. Besides that, the exemption limit for those paying interest on a home loan for a self-occupied house was raised by 50,000 to 2 lakh.

These hikes under different sections brought some relief in a scenario where high inflation and low income growth were major causes of concern.

Besides increasing the tax exemption limits, the finance minister also brought debt mutual funds under the same tax umbrella as its peers including fixed deposits. “The amendment to consider unlisted securities and units (other than equity-oriented mutual funds) to be short-term capital asset if held up to 36 months is a significant shift from the long standing position and would have a material impact on the capital gains taxation," said Girish Vanvari, co-head of tax, KPMG. Earlier, the time limit was only one year.

Investors who withdrew money from non-equity schemes could earlier choose between taxation of 10% (without indexation) and 20% (with indexation). Now 20% is the default indexation.

Capital gains from transfer of property also came under the spotlight. “Under the existing provisions of section 54 and section 54F, capital gains arising from transfer of asset were exempt from tax upon reinvestment in residential house within a specified timeframe. It has now been clarified that the exemption shall be available if the investment is in only one residential house in India," said Sonu Iyer, partner and national leader-human capital services, EY. Moreover, exemption from long-term capital gains tax by investment in specified bonds (under section 54EC) was restricted to 50 lakh, even if the investment is made in more than one financial year.

Fine-tuning

An attempt was also made to resolve some pending taxation issues, such as treatment of income from real estate investment trusts (REITs). The instrument was given a pass-through status, which means that income from these will now be taxed in the hands of unitholders and not the fund itself. But tax experts believe that more clarification is needed in this regard. “The tax initiatives introduced regarding REITs need to be streamlined to deliver the intended benefits," said Vanvari. For example, at present, from a sponsor’s perspective, capital gains tax benefit has been given only in cases where shares of the special purpose vehicle (SPV) holding the real estate are transferred to a REIT against units, and not when real estate is directly transferred to a REIT. This way an extra corporate layer is imposed between the REIT and the real estate asset, which could result in a tax leakage to the extent of the corporate tax and dividend distribution tax paid by the SPV, explained Vanvari. There are some other REIT tax issues as well that need to be addressed.

Both individual and corporate taxpayers expect more in the coming year. “We expect announcements that would focus on promoting investments, incentivizing manufacturing and infrastructure, boosting exports, fiscal consolidation, promoting savings and measures to reduce tax litigation," said Vanvari.

The final view of the government on the shape and future of Direct Taxes Code (DTC) would be a welcome step.

“Amid weak consumer sentiment due to economic slowdown and high inflation, personal income tax slabs need to be increased," said Iyer. Besides this, experts believe that limits set under various sections many years back should be revisited and modified to be in line with current scenario. For instance, transport or conveyance allowance till 800 per month is not taxable. But this amount is too low, and should be rationalized. The same goes for expenses such as children’s education and hostel allowance. “The current limits are too less and do not reflect the high expenses involved in the current education system," said Iyer.

Apart from children’s education, owning a house is a major financial goal for individuals. But with high capital values, most home buyers have to borrow large amounts to finance this purchase.

Tax benefit on interest payment of home loan could be increased. “Deduction of interest on housing loans should be increased to 5 lakh," said Iyer.

Sky-high medical costs and increase in health insurance premiums need attention. Most experts believe that deduction under section 80D for health insurance premium should also be raised from 15,000 to levels of 50,000, and from 5,000 for preventive health check-ups to 15,000.

But Rajesh Srinivasan, partner, Deloitte Haskins & Sells, LLP, feels that such changes may not take place so soon. “The focus would be more on industries, infrastructure, and economic growth. Do not expect much for individual taxation," he said.

While 2014 saw some changes take place, further streamlining of tax rules is likely in 2015.

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