Important information
about budget proposals on income tax :
- Budget proposals on income tax do not become the law immediately.
- Modifications, albeit minor, are often made to few of the proposals while actually passing the law.
- The proposals become a law when both the houses of the Parliament pass the bill and the President of India gives his assent thereto.
- Almost all of the
proposed amendments to the tax law would be effective from the Financial
Year 2014-15. The tax returns for FY 2014-15 would be filed after you
receive your Form 16 for the year in April 2015.
HIGHLIGHTS :
i) Increase in basic exemption limit from Rs. 2
lakh and Rs. 2.5 lakh :
This proposed change would result in tax saving of Rs. 5,150 for
most individual tax payers.
There has been a wide expectation that the amount of basic
exemption would be increased to Rs. 5 lakh. However, that was not feasible
considering the revenue and fiscal deficit targets set by the government. Given
this constraint, this proposed increase of 25% from Rs. 2 lakh to Rs. 2.5 lakh
is a welcome move from the Honorable Finance Minister.
ii) Increase in the
ceiling for deduction of interest on loan taken for purchase of house (section
24(b)) :
Taxpayers would get more from their housing loans. Ceiling of
deduction on interest on housing loan is proposed to be increased from Rs. 1.5
lakh to Rs. 2 lakh in respect of self-occupied houses. For those who are paying
high amount of interest, the additional tax savings would be up to Rs. 15,450.
This again is a welcome change considering that the previous limit
of Rs. 150,000 was set many years ago. However, it would have been more
appropriate to set a limit which would change every year based on annual change
in some index relating to housing prices and in the interest rates.
iii) Increase in the
ceiling for deduction for investment (sections 80C, 80CCC and 80CCE) :
Now, you have more incentive to invest more for tax savings.
Ceiling on deduction on investments is proposed to be increased to Rs. 1.5
lakhs from Rs. 1 lakh. Individuals can have tax savings of up to Rs. 15,450.
The common investments covered are EPF, PPF, Life insurance
premium, housing loan repayment, children tuition fees, etc.
A welcome move considering that the limit was set many years ago.
Those who are in 10% tax bracket are unlikely to take benefit of this enhanced
limit. However, the taxpayers in 30% tax bracket, i.e. those having annual
taxable income of over Rs. 10 lakhs would definitely consider making additional
investment for extra tax savings.
iv) Changes in rules regarding
tax exemption reinvestment of on long term capital gains on sale of a house
(sections 54 and 54F) :
The tax law provides for deduction from long term capital gains
arising on sale of a house if the amount of gain is invested in a residential
house. There was a lack of clarity about the quantum of tax deduction if
taxpayer reinvested the amount of the long term capital gains in more than one
house. The proposal seeks to clarify that the investment made only in one house
would qualify for the tax deduction. Further, it is also clarified that the
house to be acquired should be within India only.
A similar change is proposed in section 54F as well.
These proposed changes would over rule many judicial
pronouncements wherein the taxpayers were allowed tax benefit on purchase of
multiple houses and in some cases purchase of houses outside of India.
Taxpayers would be disappointed with this proposal which is
restrictive. However, a good part is that the law is now sought to be clearly worded
and would avoid unnecessary litigation.
v) Changes in rules
regarding tax exemption reinvestment of on long term capital gains on sale of
any asset in capital gains tax saving bonds (section 54EC) :
There was a lack of clarity on the amount of tax deduction on
reinvestment in capital gains tax saving bonds when the capital asset was sold
in the second half of the year. A lot of taxpayers claimed a deduction of Rs. 1
crore by splitting the investment in two financial years. It is now clarified
that such splitting is not permissible and therefore, the total deduction in a financial
year cannot exceed Rs. 50 lakhs.
While the proposed amendment provides more clarity, the taxpayers
would be disappointed over the fact that the maximum amount of deduction now
stands reduced from Rss 1 crore to just Rs. 50 lakhs.
vi) Changes to taxation of
income arising from non-equity oriented mutual funds :
So far, the units of non-equity oriented MFs were considered as
long term capital assets if those were held for more than 12 months. It is
proposed to change this period to 36 months. (Section 2(42A))
Currently, the taxpayers have an option to pay income tax on the
long term capital gains on sale of such units at the rate of 10% without
availing indexation benefit. It is proposed to remove this option. This would
mean that the taxpayers would have to pay income tax at the rate of 20% after
taking into consideration indexation benefit. (Section 112).
The Honorable Finance Minister, however, has been kind enough to retain the indexation benefit available on the units of non-equity mutual funds held for more than 3 years.
These above changes would mean that the investments alternatives
to FDs such as FMPs would no longer be attractive unless the investments are
made for more than 3 years.
vii) Taxation of REITs (Real Estate
Investment Trusts) (section 10(38) and section 111A) :
REITs are structurally similar to mutual funds and invest only in
real estate assets. It is proposed that the tax treatment of investments in the
units of listed REITs would be made at par with those of listed equity shares.
Therefore, the long term capital gains on sale of units of listed REITs would
be made tax exempt and the short term gains would be taxed only @ 15%.
This proposal would make investment in REITs very attractive from
tax perspective.
viii) Other changes :
The rate of dividend distribution tax (DDT) payable by companies
and non-equity oriented mutual funds is proposed to be increased slightly by a
grossing up formula. (Sections 115O and 115R)
It is proposed to tax forfeiture of advance amount received on failed
asset sale transactions as ‘income from other sources.’ (Sections 2(24) and
56). Earlier such forfeited amount was reduced from the cost of the asset being
sold. In cases where the forfeited amount was more than the cost of the asset,
the excess was considered as a capital receipt and as non-taxable. It was
believed that this rule was misused and therefore this proposed amendment seeks
to plug this loophole.
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