Finance Minister Arun Jaitley presented his government's first Budget yesterday. While surcharge and education cess remain the same, there are other significant changes.
1) More savings for individuals
The minimum income tax exemption limits have been altered.
The Rs 2 lakh exemption limit has been increased to Rs 2.5 lakh for individuals below 60 years of age. While for senior citizens, the limit has gone up from Rs 2.5 lakh to Rs 3 lakh. This provides relief for those in the lower tax brackets.
Also, the limit under Section 80C has been increased.
Section 80C is probably the section people are most familiar with regarding the Income Tax Act, 1961. The limit under this section is currently Rs 1 lakh irrespective of how much you earn and under which tax bracket you fall under. The Budget has increased it to Rs 1.50 lakh.
2) PPF
Just like Section 80C, the limit for investment in the Public Provident Fund, or PPF, has been raised to Rs 1,50,000 per fiscal. Up from the current limit of Rs 1 lakh. So individuals who invest in PPF to avail of the deduction under Section 80C will find that both the limits have been increased by Rs 50,000.
PPF is one of the most popular tax-saving schemes and is backed by the central government assuring investors of complete safety.
Not only do investors get a tax deduction on investing, but even the interest earned is tax free and compounded. The amount received on maturity is also free from tax.
3) Home loans
The repayment of the principal component of home loans is allowed as a deduction under Section 80C. Since the section’s limit has increased, it is assumed that the limit for claiming a deduction for the principal repayment of the home loan has also gone up to Rs 1.50 lakh.
Instead, the interest component that can avail of a deduction has gone up. Under Section 24 of the Income Tax Act, interest on home loans is eligible for a tax deduction. The current limit is up to Rs 1.50 lakh for a self-occupied house.
Individuals were hoping that the limit would go up to Rs 4 lakh due to the sharp rise in property prices over the years.
Unfortunately, it has been upped to just Rs 2 lakh.
4) Capital gains on mutual funds
In a surprise move, the finance minister has increased long-term capital gains tax on debt mutual funds from 10% to 20%, while the holding period has been increased from 12 months to 36 months.
The Budget strategy report stated that the long-term capital gain arising on transfer of a unit of a debt mutual fund shall be chargeable to tax at the rate of 20% after allowing indexation, instead of 10% without indexation.
That means the tax break for long-term capital gains will happen only on 3-year holdings. So if you sell before this period, you are liable for short-term capital gains tax, which is taxed at your income level.
This move will hit debt fund investors who have a shorter investment time frame and they may gravitate towards bank fixed deposits. My colleague Niranjan Risbood, who is the director of fund research, believes that it could lead to the launch of 3-year FMPs or capital protected products to cater to investors who now have to have a 3-year holding period. International feeder funds and Gold ETFs would also be impacted by this new ruling, since all these funds are taxed as debt funds.
5) DDT
Though not a direct hit, it will impact the dividends being distributed by a company or a mutual fund.
Dividend distribution tax, or DDT, is to be levied on gross amount instead of amount paid net of taxes.
As of now, the rate of dividend distribution tax was 15% calculated on the net distribution. The Budget suggests that it will now be grossed up. That assumes that the tax paid is also part of the amount distributed and, therefore, the tax is calculated on the total of dividend distributed and the DDT paid.
For instance, let’s assume a company is distributing Rs 100. Till date, it paid Rs 15 as DDT. Hence the total outgo while distributing dividend was Rs 115.
Now this 100 is assumed to be 85% of the total amount being distributed and hence tax is calculated as 100/0.85 x 15% = Rs 17.65. Hence the total outgo on account of dividend distribution is Rs 117.65, 15% of which goes as DDT (Rs 17.65) and the rest 85% is distributed as dividend (Rs 100 in our example).
