How Union Budget 2018 impacts individual taxpayers
Budget 2018 adopts a pragmatic approach by providing some income tax relief to salaried taxpayers, senior citizens, and SMEs
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“Four years ago, we pledged to the people of India to give this nation an honest, clean and transparent Government". With these opening remarks, finance minister Arun Jaitley presented the last full budget of the current government on 1 February.
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Amid high expectations from corporates, economists, the salaried class, farmers and home-makers, all hoping for some favourable changes, the finance minister had a tough task at hand to balance these expectations and deliver a budget, which would put India back on a faster growth trajectory after a series of major structural reforms, including demonetisation of high-value currency, goods and services tax (GST) and the introduction of bankruptcy and insolvency law.
While making the proposals from a personal tax perspective, Jaitley announced that due to the changes already introduced in the previous three budgets, no further amendments would be proposed in the structure of the income tax rates for individuals in the Union Budget 2018. Further, it is important to note that the government did constitute a direct taxes committee to monitor the current tax legislation and also to invite various suggestions/recommendations for making improvements in the respective legislation.
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To provide some relief to the salaried class, Jaitley re-introduced “Standard Deduction" of up to Rs40,000, but a large part of the benefit has been diluted by withdrawing the current exemptions on transport allowance (Rs19,200 per annum) and medical reimbursement (Rs15,000 per annum). Therefore, the effective reduction in the taxable income, on an average, is only to the tune of Rs5,800 {40,000- (19,200+15,000)}. However, as rightly said by the FM in his budget speech, this amendment would provide a significant benefit to the senior citizens who have retired and are receiving pension income. Currently, the pensioners do not enjoy any allowance on account of transport and medical expenses, but claiming a standard deduction would prove to be a big relief for this class of taxpayers.
A much anticipated move taken by the government is with respect to long-term capital gains (LTCG) tax on shares. Shares or units of equity-oriented mutual funds are categorized as long-term if held for more than 12 months. In the current scenario, if any gain(s) arises on transfer of such equity shares/units of equity oriented mutual funds and securities transaction tax (STT) is duly paid, then such gain(s) are not taxable in the hands of a taxpayer. Consequently, this regime appears to be inherently biased against the manufacturing sector, and has encouraged diversion of investment to financial assets. It has also led to a significant erosion in the tax base, resulting in loss of tax revenue. Accordingly, to bring in parity with other asset classes and to curb erosion of tax base, Jaitley has levied a tax of 10% if such gains exceed Rs100,000 in a particular financial year without allowing the benefit of cost inflation indexation. This would result in equity markets bearing the brunt of both taxes together i.e. capital gains tax and STT.
It is interesting to note that the above proposal seems to be a logical move, in line with the recent amendments in tax treaties with countries like Mauritius, Singapore and Cyprus which gives power to the Indian tax authorities to tax the capital gains arising out of India.
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However, to rescue investors, FM made it clear that gains till 31 January 2018 will be grandfathered i.e. until 31 January, gains will be exempt from taxation. Tax will be levied only upon transfer of the long-term equity shares or units of equity-oriented mutual funds on or after 1 April 2018.
Further, it is pertinent to note that Jaitley started his speech by putting special emphasis on senior citizen taxpayers. Hence, budget 2018 brought some good news for this class of taxpayers as limit of deduction under Section 80D has been proposed to increase from Rs30,000 to Rs50,000 in respect of payments towards annual premium on health insurance policy, or preventive health check-up. It shows the concern of the government towards improving the health and safety of the senior citizens of this country.
With respect to income earned from other sources, currently, a deduction up to Rs10,000 is allowed under section 80TTA to a taxpayer on interest income earned from savings bank account. To further extend this benefit to senior citizens, it is proposed to insert a new section, 80TTB, so as to allow a deduction up to Rs50,000 on interest income earned from deposits with banks and post offices held by senior citizens.
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In order to compensate the revenue loss and fund the above benefits, Jaitley has proposed to replace the education cess of 3% with a health and education cess of 4%.
In a nutshell, Union Budget 2018-19 was primarily focused on boosting growth and employment. The budget also supports agriculture, infrastructure and rural development.
On the tax front, the government faced a tough task of meeting demands of different stakeholders and to contain the fiscal deficit. Accordingly, a more pragmatic approach has been adopted by providing some tax relief to salaried tax payers, senior citizens, and small and medium enterprises (SMEs). Also, the government has taken a bold decision by introducing long-term capital gains on listed securities as a measure to boost revenues, as against the popular demand of maintaining a status quo.
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FAQs
1. What will be the tax treatment of the gains arising from transfer of share or unit made between 1 February 2018 and 31 March 2018?
The new regime for taxation of long-term capital gains (LTCG) on sale of equity shares will apply with effect from assessment year (AY) 2019-20 (1 April 2018 to 31 March 2019). Accordingly, all the transfers made between these dates will be covered under clause (38) of Section 10 of the Act. Further, this has also been clarified in the frequently asked questions (FAQs) that were recently issued by the government.
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2. What exactly does the “grandfathering clause" mean and what is its relation with LTCG on transfer of equity shares?
A grandfathering clause in any new tax regime allow taxpayers who made relevant transactions under the old law to continue to enjoy a concession or a beneficial provision, until the original time frame for it runs out.
Budget 2018 also provides a “grandfathering clause" attached to the new Section 112A on LTCG to shield investors who have purchased listed shares or equity mutual funds before 1 February 2018, from the impact of the 10% tax. The extent of gains (or losses) will be computed based on your “cost of acquisition" and “fair market value" as on 31 January 2018.
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Cost of acquisition shall be higher of:
a) the actual cost of acquisition of such asset; or
b) lower of fair market value as on 31 January 2018 and full value of consideration
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This can be explained with below illustrations:
— Actual cost of purchase on 1 April 2017: Rs1,000,000
— Highest quoted price on 31 January 2018: Rs1,200,000
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— Full value of consideration on 16 April 2018: Rs1,500,000
— Cost of acquisition for capital gains: Rs1,200,000
— LTCG (Rs300,000-100,000): Rs2,00,000
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Tax at 10%: Rs20,000
3. Will senior citizens be eligible to claim existing deduction of Rs10,000 under Section 80TTA with respect to interest earned on savings bank account along with a new deduction proposed of Rs50,000 under Section 80TTB?
It has been made clear that current deduction under Section 80TTA of Rs10,000 on savings bank interest shall no longer be available to this class of taxpayers.
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Akhil Chandna and Ajay Arora contributed to this article.
Vikas Vasal in national leader tax—Grant Thornton India LLP
You can send your queries to vikas.vasal@in.gt.com
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