The Budget 2018 presented by the Finance Minister (FM) in the Parliament on 1 February 2018 focusses extensively on proposals for huge allocations towards expenditure for much that ails many key segments of our country—poor, farmers, women, senior citizens—the theme being their ‘ease of living’. Budget 2018 also effectively plans to prepare for ‘India of the future’ with focus on Digital India, STEM (science, technology, engineering and maths) and other relevant skills.
Without doubt, the promise of Universal Healthcare (being called Modicare) for almost half the country (intended coverage 100 million families), is what stands out. Naysayers may call it an empty promise, yet this populist measure carries with it a unique stamp of the present government, of prioritizing ‘social security for all’ and sensitivity to social issues. What is reassuring to note is that the pressure to be populist has not led the government to lose its commitment to fiscal prudence. Thematically, the budget story continues to hold on to its agenda of fundamental socioeconomic reforms in the country. For the individual taxpayers, there are a few proposals that should bring cheer.
Standard deduction is back
As per Budget data, salaried individuals paid an average tax of Rs76,306 as against Rs25,753 per individual business taxpayer for the assessment year 2016-17. So, to provide some relief to salaried taxpayers the budget proposes to introduce annual standard deduction of Rs40,000 (or actual salary, whichever is less) in lieu of the annual exemption for transport allowance of Rs19,200 and medical expense reimbursements of Rs15,000. So the net effect would reduce the taxable income by Rs5,800, and would bring marginal relief to lower and middle income salary earners. However, sensibly so, the transport allowance for differently abled persons and medical expense reimbursements in case of hospitalization for all employees will continue in addition to the standard deduction.
Benefit to senior citizens
The other big beneficiaries of budget 2018 are the senior citizens. Senior citizens who have pension income will enjoy standard deduction as well and this without foregoing exemption for transport and reimbursement for medical expenses. Further, the deduction on interest income from all deposits barring corporate deposits has gone up from Rs10,000 to Rs50,000. So currently, deduction from interest income from savings account in banks, co-operative societies and post offices, up to Rs10,000, is available for all individuals. This does not include deduction for interest income from fixed deposits. For senior citizens, it is proposed that the deduction from interest income on deposits will be increased from Rs10,000 to Rs50,000. And these deposits also include fixed deposits and recurring deposits. Even the threshold interest income to deduct withholding tax by the payer in case of senior citizens from interest income has been proposed to be increased from Rs10,000 to Rs50,000.
The deduction available under section 80D towards premiums paid for a health insurance policy has gone up from Rs30,000 to Rs50,000. This translates into a tax saving of up to Rs15,600 on a deduction limit of Rs50,000. Another proposal that will bring joy to senior citizens is the extension of Pradhan Mantri Vaya Vandana Yojna up to March 2020 with an assured interest of 8% and the limit on the investment amount to be enhanced from existing Rs7.5 lakh to Rs15 lakh.
But when you set out to do so many good and aspirational things, you also need to think of innovative ways to fund them. It is true that the cost of the development programmes has to be borne by taxpayers. Thus, the burden has fallen on to the large corporates and the individual taxpayers and you will shoulder this burden through a higher cess on income tax, long term capital gains (LTCG) tax and dividend distribution tax on equities.
Currently, Education Cess and Secondary Education Cess is to be paid by every taxpayer at 3% of income-tax and surcharge if applicable. Now it’s proposed to introduce health and education cess at 4% of income-tax and surcharge if applicable. A 1% increase in cess will increase the maximum marginal rate for all classes of taxpayers. The maximum marginal rate for individuals with income exceeding Rs1 crore would now be 35.88% (30% income-tax plus 15% surcharge plus 4% health and education cess) from 35.54%. Introduction of LTCG tax is a major announcement. The headwinds prior to roll out of the Budget—with economists arguing for parity among various investment instruments and continued buoyancy in the stock market—should have prepared us for the change in the LTCG regime. And so, it has happened. Under the current regime, LTCG (holding period more than 12 months) on sale of listed equity shares, units of an equity-oriented mutual fund and units of a business trust, are exempt from income-tax. The finance minister has proposed to now tax such LTCGs at the rate of 10% (plus surcharge, if applicable and education cess) without allowing any benefit of indexation if the LTCG exceeds Rs1 lakh.
But, where the equity shares or units of equity-oriented mutual funds or units of a business trust have been acquired prior to 1 February 2018, the cost of acquisition will be deemed to be higher of (a) actual cost or (b) lower of (i) fair market value as on 31 January 2018 or (ii) sale consideration. Thus, the finance minister has lived to the promise of no retrospective taxation. This tax will be applicable from 1 April 2018. Then there is dividend distribution tax (DDT) on equity-oriented mutual funds. Currently, there is no DDT on distributions from equity-oriented mutual funds. Budget 2018 proposes 10% (plus surcharge and education cess) on income distributed to any person by an equity-oriented mutual fund. This will bring parity between growth funds and dividend funds.
From an individual tax perspective, while there may not have been a dramatic tax rate dip, the momentum in agriculture, rural sector and industry would help in better infrastructure and quality of life. Populism and higher fiscal deficit notwithstanding, so long we spend our money wisely and on much-needed change in the lives of a large section of the society, we can say we have done well. It is heartening to note that the honourable finance minister has maintained fiscal prudence while pushing the development agenda.
Sonu Iyer is tax partner and people advisory services leader, EY India