Finance Minister Arun Jaitley in Union Budget 2017 slashed the income tax rate for individuals in the lowest income tax slab to 5 per cent, a move which will also benefit individuals in higher tax brackets. But tax experts who were expecting a hike in Section 80C limit were a bit disappointed. “The limit of Section 80C (of the Income Tax Act) could have been increased from Rs. 1.5 lakh to Rs. 2 lakh in this Budget as the existing limit is not sufficient to cover various payments like PF, insurance, tuition fees, etc. Further, the cap on certain allowances like, children education allowance, medical reimbursements and hostel allowance have been fixed a long time ago. It could have been increased in this Budget,” said Rakesh Bhargava, director of Taxmann.
Here are 10 things to know about the proposed changes in tax laws for individuals:
1) Mr Jaitley reduced income tax rate on income between Rs. 2.5 lakh and Rs. 5 lakh to 5 per cent from 10 per cent. However, he reduced Section 87A rebate from Rs. 5,000 to Rs. 2,500. And no rebate will be applicable for taxpayers having income above Rs. 3.5 lakh.
2) This means tax savings of up to Rs. 7,700 for people with taxable income between Rs. 3 lakh and Rs. 5 lakh. And for persons with taxable income between 5 lakh and Rs. 50 lakh, tax savings of Rs. 12,900. A 10 per cent surcharge has been proposed for individuals having income ranging from Rs. 50 lakh to Rs. 1 crore. (Existing surcharge of 15 per cent will remain same for individuals having income above Rs. 1 crore.)
3) A simple one-page form will be introduced for filing tax return for individuals having taxable income up to Rs. 5 lakh other than business income. The finance minister also said that a person in this category who files income tax return for the first time would not be subjected to any scrutiny in the first year unless there is specific information available with the tax department regarding his high value transaction.
4) No deduction will be allowed for investment in Rajiv Gandhi Equity Saving Scheme from Assessment Year 2018-19. This tax-saving scheme, announced in the Union Budget for financial year 2012-13, was designed exclusively for the first-time individual investors in the securities market with gross total income below a certain limit.
5) Income tax officials can now reopen tax cases for up to 10 years if search operations reveal undisclosed income and assets of over Rs. 50 lakh. Currently, tax officers can go back up to six years to scrutinise the books of accounts of assesses. The amendment to the Income Tax Act will take effect from April 1, 2017. This means that the books of accounts of an assessee can be reopened by the taxman back till 2007.
6) Taxpayers who do not file their returns on time will have to shell out a penalty of up to Rs. 10,000 from Assessment Year 2018-19. However, if the total income of the person does not exceed Rs. 5 lakh, the fee payable under this section shall not exceed Rs. 1,000.
7) Mr Jaitley proposed a number of changes that will attract lower tax on gains from property sale. The holding period of a property for qualifying as long-term gains will get reduced to two years, from three years currently. According to the current tax norms, if a property is sold within three years of buying, the profit from the transaction is treated as short-term capital gains and is taxed according to the slab rate applicable to him/her.
8) To address the existing anomaly of interest deduction in respect of let-out property vs self-occupied property, the finance minister proposed that the set-off of loss under the head “income from house property” against any other head of income will be restricted to Rs. 2 lakh for any assessment year. And the loss not set off would be allowed to be carried forward for set off against house property income for eight assessment years.
Earlier, for properties rented out, a borrower could deduct the entire interest paid on the home loan, after adjusting for the rental income. However, according to the proposed change, the borrower could claim deduction of up to Rs. 2 lakh after adjusting for rental income. Experts say the move will dampen the demand for buying a second property for the purpose of earning rental income. “High net worth individuals used to buy properties on loan and were able to set off the full interest liability against the lettable value of property usually resulting in loss which would substantially bring down tax liability and consequently their borrowing costs. This avenue is now closed and loss above 2 lakh would have to be mandatory carried forward,” said Sandeep Sehgal, director of tax and regulatory at Ashok Maheshwary & Associates LLP.
9) Individuals will be now required to deduct a 5 per cent TDS (tax deducted at source) for rental payments above Rs. 50,000 per month. Tax experts say that the move will ensure that persons who get large rental income come into the tax net. It will be effective from June 1, 2017.
10) Partial withdrawals from National Pension System (NPS) will not attract tax. According to the proposed changes, an NPS subscriber can withdraw 25 per cent of his/her contribution to the corpus for emergencies before retirement. Remember that withdrawal of 40 per cent of the corpus is tax-free on retirement.