Budget 2016 — Salient Points

The latest Union Budget is a mixed bag for many investors. Though the budget had many sops for the borrowers & middle class folks, there were a few setbacks too. Let’s look at ten most important takeaways from the latest budget.

1. Tax Relief for First Time Home Buyers

First time home buyers have been offered a fresh tax sop of Rs 50,000 per annum.  The deduction is in respect of interest paid for a home loan. There are a few conditions to be met.

  1. The value of the house shall not exceed Rs 50 lacs.
  2. The loan amount shall not exceed Rs 35 lacs.
  3. The loan must be sanctioned between April 1, 2016 and March 31, 2017.

The benefit will be there for the entire tenor of the loan. Hence, if the loan tenor is 20 years, you will get additional tax deduction of Rs 10 lacs (20 X 50,000) over the next 20 years. For someone in the 30% tax bracket, that is an additional saving of Rs 15,450 per financial year. This deduction of Rs 50,000 is over and above deduction of Rs 2 lacs (for self-occupied property) under Section 24 of the Income Tax Act. Hence, the new buyers can enjoy tax benefit of up to Rs 2.5 lacs per financial year.

Do note you may not be able to get complete benefit (of the new proposal) if the overall interest cost during a financial year is less than Rs 2 lacs. This can happen during the later years of your loan.

For a loan of Rs 35 lacs (10% p.a., 20 years), you will pay interest of Rs 3.47 lacs in the first year. With this proposed change, you can take benefit for Rs 2.5 lacs. The effective cost of Rs 35 lacs loan (20 years, 10%) will be 6.10% p.a. The effective cost of Rs 20 lacs loan (20 years, 10%) will be 5.24% p.a.

I have assumed you will be able to get complete tax benefit for principal repayment (upto Rs 1.5 lacs per financial year) under Section 80C. If you are investing in other Section 80C products such as PPF, EPF, ELSS etc, you won’t be able to get the complete benefit of principal repayment and hence the effective cost may go up.

2. Period for Construction Extended to 5 Years (from 3 Years)

You can avail tax deduction for up to Rs 2 lacs towards interest paid for a housing loan (for a self-occupied property). However, the benefit was limited to Rs 30,000 per financial year if the house was not completed within 3 years from the end of financial year in which the loan was taken. With delay in construction and possession so common, this was a serious problem for buyers since they couldn’t get the full tax benefits if they didn’t possession on time. In the latest budget, the deadline of 3 years (under Section 24) has been extended to 5 years. This will bring a lot of relief to the buyers. For more on tax benefits of home loans, do go through the following post.

3. Benefit under Section 80GG Increased to Rs 60,000 per Year

Benefit under Section 80GG is available to self-employed or those employees who do not get HRA from their employers. Earlier, the maximum tax benefit under Section 80GG was limited to Rs 2,000 per month.  This limit has been proposed to be enhanced from Rs 2,000 per month to Rs 5,000 per month. Hence, the maximum tax benefit under Section 80GG is now Rs 60,000. There are other conditions to be met before you avail tax benefit under Section 80GG. Go through this post for more details.

4. 40% of NPS Corpus at Retirement Is Tax-Free

This should bring smiles to all NPS (National Pension System) subscribers.  Earlier, NPS used to fall in EET (Exempt-Exempt-Taxable) i.e., you get tax benefits for investing in NPS (under Section 80CCD(1), 80CCD(1B) and 80CCD(2)) and returns are exempt from tax. However, the corpus at maturity was taxable. So, the lump sum withdrawal at the time of retirement was taxable and the annuity (pension) income was taxable in the year of receipt.

Under the budget proposal, the lump sum withdrawal at the time of retirement is exempt from tax up to 40% of the accumulated corpus. Annuity income will continue to be taxed in the year of receipt. For more on NPS taxation rules, do go through the following post.

5. Tax Rebate under Section 87A Increased to Rs 5,000 p.a.

Tax rebate under Section 87A has been increased from Rs 2,000 per annum to Rs 5,000 per annum. This tax rebate is available to only those tax-payers whose total income is less than Rs 5 lacs. Please note rebate is different from deduction. Under rebate, the total tax liability is reduced by the rebate amount. Under deduction, only the income is reduced by deduction amount and tax liability is calculated over the reduced income.

6. EPF Retirement Corpus to Be Taxed (Proposal Withdrawn)

Update: This is perhaps the most unpopular proposal by the Finance Minister. We saw heavy protests against this move and the proposal has now been withdrawn.

Employer contribution to EPF in excess of Rs 1.5 lacs to be taxed. You make contribution of 12% of your basic salary to your EPF account and the employer makes a matching contribution. Current rule is that the employer contribution in excess of 12% is taxed in the hands of the employee. There is no absolute cap. The Finance Minister has proposed to impose an absolute cap of Rs 1.5 lacs over employer contribution. So, if your employer is contributing Rs 2 lacs to your EPF account, be prepared to shell out income tax on excess Rs 50,000.

EPF corpus at the time of retirement to be taxed. For contributions made on or after April 1, 2016, interest earned on such contribution shall be taxed. Only 40% of such interest income shall be exempt from tax at the time of retirement. Interest earned on contributions made on or before March 31, 2016 shall be exempt from income tax at the time of retirement. So, essentially, 60% of the interest income on contributions made on or after April 1, 2016 shall be taxed. Even for this 60%, you won’t have to pay any tax if you use the amount to purchase annuity. This rule does not apply to those whose monthly income is less than Rs 15,000.

There is a lot of confusion over EPF proposal. There has been a lot of flip flop by the Government. You can read the clarification by the Ministry of Finance. Though nothing is finalized yet, if you want to assess the impact of proposed taxation on your EPF corpus, use the following EPF calculator.

7. Service Tax Effectively Increased to 15%

Krishi Kalyan Cess (0.5%) is proposed to be levied on all taxable services from June 1, 2016. So, service tax effectively becomes 15% — 14% service tax, 0.5% Swachh Bharat cess and 0.5% Krishi Kalyan Cess. Be prepared to shell out more while dining out.

8. Dividend in Excess of Rs 10 Lacs to Be Taxed

If your total dividend receipt during the financial year exceeds Rs 10 lacs, you will have to pay tax at the rate of 10% on the excess dividend. Earlier, the dividend was exempt from income tax in the hands of the investor. Do note this rule is applicable only to dividend from equity shares (and not mutual funds).

9. Interest Earned on Gold Monetization Scheme Is Exempt from Tax

Interest from deposits under gold monetization scheme, 2015 is now exempt from Income Tax. There shall be no capital gains implication either at the time of maturity of such deposit.

Additionally, sovereign gold bonds will not be subject to capital gains tax at the time of redemption. However, if you sell the bonds in the secondary market, you will have to pay capital gains tax. Interest from the Sovereign Gold Bonds will continue to be taxed.

10. Surcharge Increased from 12% to 15%

With an aim to tax rich investors more, the rate of surcharge for tax-payers with annual income of Rs 1 crore or more has been increased from 12% to 15%.

Author’s Note: Please understand these are only budget proposals. These rules will come into force once these are passed by the Parliament.

Additional Read

  1. Budget Speech
  2. Finance Bill, 2016
  3. Clarification from Ministry of Finance on EPF Tax Rules
  4. Clarification from Revenue Secretary on EPF Tax Rules

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