This year’s Union Budget is a mixed bag for salaried class and the real estate investors. Here is a look at key budget announcements.
- Reduction in tax rate from 10% to 5% for income tax slab of Rs 2.5 lacs to Rs 5 lacs (Positive)
- Introduction of Surcharge of 10% for taxable income between Rs 50 lacs and Rs 1 crore (Negative)
- Reduction in rebate from Rs 5,000 to Rs 2,500 under Section 87A. The eligibility limit also reduced from Rs 5 lacs to Rs 3.5 lacs (Minor negative)
- Set off of loss for Income from House Property capped at Rs 2 lacs per financial year (Huge Negative)
- Holding period for real estate (for LTCG) changed from 3 years to 2 years (Positive)
- Change in base year for calculation of indexation changed from 1981 to 2001 (Positive)
- More option under Section 54EC (Mild positive)
- TDS if monthly rent exceeds Rs 50,000 (Operational hassle)
- Better tax benefit for NPS contribution to self-employed (Much ado about nothing)
- Partial Withdrawals from NPS exempt to an extent (Provides clarification)
- Penalty on delay in filing returns
#1-3 If you consider the first three announcements together, it is a positive for everyone. Only those whose income falls between Rs 50 lacs and Rs 1 crore will feel the pain. For everyone else, the tax liability will go down.
| Taxable Income (Rs) | 3 lacs | 3.5 lacs | 5 lacs | 10 lacs | 20 lacs | 75 lacs |
| Rebate under Section 87A | 2,500 | 2,500 | NA | NA | NA | NA |
| New Tax Liability (Before cess and surcharge) | – | 2,500 | 12,500 | 112,500 | 312,500 | 2,062,500 |
| New Tax Liability (After cess and surcharge) | – | 2,575 | 12,875 | 115,875 | 321,875 | 2,336,813 |
| Earlier Tax liability (After cess and Surcharge) | – | 5,150 | 20,600 | 128,750 | 334,750 | 2,137,250 |
| Net Tax Savings (After Cess and Surcharge) | – | 2,575 | 7,725 | 12,875 | 12,875 | (199,563) |
| * I have not considered any tax deductions for this analysis. Earlier, rebate of Rs 5,000 was upto taxable income of Rs 5 lacs) | ||||||
You can see everyone benefits from the aforesaid announcements except for those whose taxable income falls between Rs 50 lacs and Rs 1 crore. For those who have an income above Rs 1 crore, they were already subject to surcharge of 15% and that has not been tinkered with.
If your taxable income is up to Rs 5 lacs, you will benefit by up to Rs 7,500 (before cess) and Rs 7,725 (after cess). If you fall in higher tax slabs, you will gain a constant Rs 12,500 (before cess) and Rs 12,875 (after cess).
The only exception is the taxpayer whose taxable income falls between Rs 50 lacs and Rs 1 crore. The imposition of surcharge of 10% not only wipes away the benefit of Rs 12,500 (through reduction in slab rate) but may even impose an additional tax burden on such taxpayers.
#4 If you have taken a big home loan for let-out property, this will come as a serious setback to you. Suppose you earn a rental income of Rs 2 lacs per financial year and pay interest of Rs 6 lacs towards the loan. I have ignored standard deduction etc. This will result in loss under Income from House Property of Rs 4 lacs. Earlier, you could set off the entire Rs 4 lacs against income from other heads. From the next financial year, you can only set off loss under Income from House property up to Rs 2 lacs per financial year. Your income tax liability may therefore increase. You can carry forward the loss for up to 8 years. In a way, the Government has brought self-occupied property and let-out property (or deemed let-out property) on par.
#5 The holding period for the capital gains (resulting from sale of a real estate asset) to quality as long term capital gains has been reduced from 3 years to 2 years. As we know, long term capital gains (20% after indexation) get much favorable tax treatment as compared to short term capital gains (marginal income tax rate). Therefore, this can be considered a favorable move.
#6 Moreover, base year for indexation will be shifted from 1981 to 2001. While calculating capital gains, you have an option to consider your acquisition cost as actual purchase cost or the fair market value (FMV) in the base year. Therefore, if you purchased a property (or any capital asset) in 1985, you can now either consider your actual purchase price or the FMV in 2001 as your acquisition cost. So, you will have to pay limited tax on appreciation in price of the property till 2001. A big positive if you have old real estate investments. Your capital gains tax liability will go down.
#7 Till now, you could invest up to Rs 50 lacs in capital gains bonds from NHAI and REC to save long term capital gains tax. The Finance Minister has announced that you will get more options under Section 54EC. The cap remains unchanged at Rs 50 lacs.
#8 If you are paying rent of more than Rs 50,000 per month, be prepared to deduct TDS of 5%. Hence, if the rent is Rs 60,000, you will pay Rs 57,000 and deposit TDS of Rs 3,000 with IT department. The relief is that you can deposit TDS once in a year (and not every month). Moreover, you are not required to TAN for the same.
#9 Earlier, self-employed could get tax benefit for contribution to NPS up to 10% of gross total income under Section 80CCD(1). Now, the number has been enhanced to 20% of gross total income. There is no change for salaried employees. The limit for employees remains at 10% of salary. Does not really change much. The benefit under Section 80CCD(1) is part of overall bucket of Rs 1.5 lacs under Section 80C. Hence, there is no additional tax benefit for self-employed. There is an exclusive tax benefit of Rs 50,000 for NPS contribution under Section 80CCD(1B). No change has been made to Section 80CCD(1B).
#10 As per revised NPS withdrawal guidelines, partial withdrawal up to 25% of own contribution (excluding employer contribution) is allowed after 10 years for defined expenses. It has been proposed to add clause 12(B) in Section 10 to make such withdrawals (up to 25% of own contribution) exempt from income tax.
#11 If you fail to file your income tax returns on or before due date, be prepared to pay a penalty. If you file after due date and before December 31, the penalty is Rs 5,000. If you file returns after December 31, the penalty is Rs 10,000. In any case, you won’t be able to file returns after March 31 (of next year). If your taxable income is less than Rs 5 lacs, the penalty will be capped at Rs 1,000.
Other Important Announcements
- People who are filing income tax returns for the first time will not come under Scrutiny (barring an exceptional case)
- For donations to charitable institutions under Section 80G, the limit for cash donations has been reduced from Rs 10,000 to Rs 2,000. Hence, cash donations over Rs 2,000 won’t be eligible for deduction under Section 80G.
- Cash transactions above Rs 3 lacs are not permitted. No person can receive a payment or aggregate of payments in cash of Rs 3 lacs or more from a single person or in a single day or in respect of transactions relating to single event or occasion.
- Cash donation to political parties has been capped at 2,000. Earlier, the limit was Rs 20,000. There is proposal for issuance of bearer electoral bonds. So, if you want to donate to a political party, you can purchase such bonds from a bank or financial institution and hand over to the political party. The payment for purchase of such bonds has to be made from bank accounts. The political party can encash the bonds in a designated bank account.
- For taxable income of up to Rs 5 lacs, there will be a single page income tax return form. Not applicable if you have business income.
- Long Term Capital Gains on sale of equity shares remain exempt from income tax. This was a major source of concern before the budget. Hence, this is relief for many equity investors. However, for tax exemption, STT needs to be paid both at the time of sale and purchase. Earlier, STT requirement was only for the sale of shares. There are a few exceptions though. This should not be a problem for those who buy and sell shares on stock exchanges. This change has been brought in to control those who use exempt long term capital gains to convert black money to white.
Disclosure/Disclaimer
The above post is based on my understanding of the Finance Bill. I am not a tax expert. You are advised to seek advice from a Chartered Accountant before taking any action. Additionally, I have merely written down proposals. These proposals will come into force once the Finance Bill is passed by the Parliament. Therefore, these proposals may be withdrawn/amended before passage of the Finance Act.