BUDGET 2018 – TAX PROVISIONS EXPLAINED
The impact of the Tax proposals for the Individual and Corporate Tax payers, simplified and explained
- Standard Deduction reintroduced for salaried class assessees; the reintroduction of the standard deduction of INR 40,000 will provide some relief to the salaried taxpayers who are not allowed to claim deduction of any expenditure from their taxable salary income. The silver lining is that this deduction is also available for pensioners too.
- Transport allowance and Medical reimbursement withdrawn; Salaried taxpayers were allowed a deduction of transport allowance of INR 19,200 (1600 pm) and medical reimbursement of INR 15,000 (1250 pm) has now proposed to be withdrawn with the introduction of standard deduction. The sad part is that the net effect of both the proposals is that the benefit to the salaried tax payer is only to the extent of INR 5,800 pa (40000 – 34200). The good part is that now salaried taxpayers need not arrange for medical bills to submit to their employers. Pensioners who were not having the earlier benefit of transport allowance and medical reimbursement, get the full benefit of the new standard deduction.
- Increase in Education and Health Cess; the removal of the existing Education Cess of 3% and introduction of the new Education and Health Cess of 4% effectively means that the Cess has increased by 1%. This would result in increase in tax liability across all categories of taxpayers. The tax rate in the highest slab (30%+15%SC+4%Cess) would go up to 35.88% from the existing 35.535%
- Women employees to contribute lesser to EPF for first three years; the proposal to reduce the employees’ contribution to PF by women employees for first three years to 8% would result in more take home income for women salaried taxpayers. The employers would have to continue their contribution at 12%.
- Government to contribute employers’ contribution to EPF for new employees; the proposal that the Government shall bear the employers’ contribution to PF for all new employees across all sectors for the first three years shall bring in more employment opportunities with reduced CTC burden for the employers.
- Turnover limit raised for reduced corporate tax rate; the proposal to extend the benefit of reduced corporate tax rate of 25% instead of 30% to companies having a turnover of upto INR 250 crores from the existing INR 50 crores will substantially reduce the tax burden of almost all the medium and small scale companies in India thus improving their bottom-line.
- Medical Insurance premia deduction limit increased for senior citizens; the proposal to increase the deduction under section 80D for medical insurance premia paid by/for senior citizens from the existing INR 30,000 to INR 50,000 will reduce their tax liability at the age where the medical costs are mounting.
- Increase in limit for exemption of interest on fixed deposits and recurring deposits for senior citizens; the proposal to increase the limit for exemption of interest income from bank and post office fixed deposits for senior citizens to INR 50,000 from the existing INR 10,000 will result in substantial tax savings for the elderly.
- Increased limit of no TDS requirement for senior citizens; consequent to the increase in the exemption limit as mentioned above, the proposal to do away with the requirement of TDS for such interest income up to INR 50,000 under section 194A will benefit the senior citizens from the hassle of claiming refund of tax by filing returns.
- Deduction for specific critical illness raised for senior citizens; the proposal to increase the deduction for specific critical illness under section 80DDB to both senior citizens (presently INR 60,000) and super-senior citizens (80 years and above) (presently INR 80,000) to INR 1,00,000 would again benefit the elderly during their times of spiralling medical costs.
- Tax exemption for NPS withdrawal extended to non-employee taxpayers; the proposal to extend the existing provisions of section 10(12A) which allows exemption up to 40% of the corpus at the time of withdrawal being extended to even non-salaried taxpayers, i.e. to self-employed individuals also is a step towards providing parity to all individual taxpayers.
- Investment limit increased for investment in PMVVY; the Pradhan Mantri Vaya Vandana Yojana is a pension plan for senior citizens to get guaranteed returns of 8% for 10 years (also exempt from GST). The investment limit under this scheme has been enhanced to INR 15 lakhs from the existing INR 7.50 lakhs. The effect of this proposal would result in a possibility of total investment of up to INR 30 lakhs for a couple if both are senior citizens.
- The investment period under PMVVY extended; consequent to increase in the investment limit, the time limit for investment under this scheme also extended from 3rd May 2018 till 31st March, 2020.
- No tax on difference between sale price and circle rate value on sale of immoveable property in certain cases; the existing provisions of section 50C which provides that if the sale price of any immovable property as per agreement is lesser than the circle rate value, the higher value shall be considered for the purposes of computation of capital gains has been diluted. It is now proposed that if the difference is less than 5%, then there will be no tax on the difference and the sale price as per agreement can be considered for capital gains calculation.
- DDT to be levied on distribution of profits by equity MFs; it is proposed to levy the dividend distribution tax on distribution of profits by equity Mutual Funds, who were hitherto exempt from this provision.
- LTCG tax to be levied on sale of listed shares and equity MFs; it is proposed to levy long term capital gains tax on sale of shares listed on recognised stock exchanges as well as the equity linked mutual funds at a flat rate of 10% without the benefit of indexation. However, for the benefit of those investors, who would have already bought such shares and MFs before the budget date anticipating no tax if held and sold after one year, a benefit is provided by way of the unrealised profits, if any, as on 31st Jan 2018 being not taxable. In other words, the market price as on 31/01/2018 shall be considered as the base for computing the LTCG tax in such cases.
- Firms must have PAN for transactions over INR 2.50 lakhs; it is proposed that every firm which enters into any financial transaction exceeding a value of INR 2.50 lakhs in a financial year shall be required to obtain a permanent account number. Further, it is also mandated that this provision of compulsory PAN shall also apply to all the directors/partners/principal officers/office bearers of such firms.
- E-assessment extended across the country; the proposal to extend the provisions of electronic assessments pan India from the existing 102 cities is a welcome move towards corruption free economy with no requirement to visit the Income Tax offices for assessment.
- Relief for companies under insolvency to carry forward losses; it is proposed that Companies under insolvency under IBC Code 2016 would now be allowed to carry forward their losses even if there is a substantial change of more than 51% in their ownership during the financial year.
- Transfer of capital assets between holding and subsidiary companies to be exempt; it is proposed that the transfer of capital assets like land, building and shares between a holding and its 100% subsidiary company shall be fully exempt from tax even if such assets are transferred at less than the fair market value.
- Tax deduction for employment generation rationalised; it is proposed to provide for enhanced deduction of 30% of wages paid to new employees even if the employee is employed for less than 240 days in the first year provided that he is retained in employment for the prescribed threshold period during the next year.
- Additional DDT on companies for loans and advances to shareholders and related concerns; it is proposed to levy dividend distribution tax on companies which give loans and advances to shareholders and to related concerns, where any shareholder has substantial interest. The earlier provisions provided for treating such loans as deemed dividend and were taxed in the hands of the shareholders.
- Restriction on cash transactions by charitable bodies; it is proposed to restrict cash transactions by charitable bodies and trusts to a maximum of INR 10,000 per transactions. Transactions above this limit shall be disallowed and subject to tax.
FCA, Grad. CWA, CS, DBM