The Budget 2018 was presented on February 1, 2018. The Finance Minister did not propose any changes to the income tax slabs and tax rates. However, much needed relief was granted to senior citizen tax-payers. There were a slew of other relief measures for senior citizens. However, the biggest setback has come to equity investors, where the Finance Minister has proposed long term capital gains on sale of equity/equity shares at 10%. Here is the list of 9 key announcements in the Union Budget, 2018 (from personal finance perspective).
#1 Income Tax Slabs and Rates Unchanged
There has been no change to income tax slab rates for the tax-payers.
Age < 60 years | Senior Citizen 60 <=Age < 80 years | Very Senior Citizen Age >=80 years | |||
| Taxable Income | Tax Slab | Taxable Income | Tax Slab | Taxable Income | Tax Slab |
| Up to Rs 2.5 lacs | Nil | Up to Rs 3 lacs | Nil | Up to Rs 5 lacs | Nil |
| Rs 2.5 lacs – Rs 5 lacs | 5% | Rs 3 lacs – Rs 5 lacs | 5% | Rs 5 lacs – 10 lacs | 20% |
| Rs 5 lacs – Rs 10 lacs | 20% | Rs 5 lacs – Rs 10 lacs | 20% | Above Rs 10 lacs | 30% |
| Above Rs 10 lacs | 30% | Above Rs 10 lacs | 30% | ||
| Rebate of Rs 2,500 for taxable income upto Rs 3.5 lacs Surcharge of 10% on income tax if the taxable income is between Rs 50 lacs and Rs 1 crore Surcharge of 15% on income tax if the taxable income is above Rs 1 crore Cess at 4% (hiked from 3%) over income tax and surcharge shall be applicable | |||||
#2 Standard Deduction of Rs 40,000 Introduced
This is a new tax relief that has been introduced. However, before you get too happy, prior benefits in the form of medical reimbursement (Rs 15,000 per annum) and conveyance/transport allowance (Rs 1,600 per month or Rs 19,200 per annum) have been taken away. Effectively, maximum relief is now Rs 40,000 (instead of Rs 34,200). Pre-tax gain of only Rs 5,800. The relief, as expected, will only be for salaried employees. At the same time, Cess (now called Health and Education Cess) has been increased from 3% to 4%. Cess is charged on your tax liability. In my opinion, a higher cess will more or less cancel out any extra relief due to standard deduction.
#3 Tax Benefit for Health Insurance Premium Hiked (Under Section 80D)
Tax benefit for health insurance premium has been hiked from Rs 25,000 per annum to Rs. 50,000 per annum. For senior citizens, the benefit has been hiked from Rs 30,000 per annum to Rs 50,000 per annum. Many insurers allow discounts if you pay premium for multiple years (say 2 or 3 years). The only issue was that the tax benefit was available only in the year of payment. However, this rule has now been changed. Now, if you pay premium for two years at one shot, you can take proportionate tax benefit in those two years. So, if you pay a premium of Rs 60,000 for two years, you can take benefit for Rs 30,000 for each of those two years.
#4 Investment Limit in Pradhan Mantri Vaya Vandana Yojana (PMVVY) Hiked
PMVVY is a scheme for senior citizens where they are guaranteed an interest income of 8% for 10 years. Now, senior citizens can invest in this scheme till March 2020. The scheme was originally available for investment till May 2018. Additionally, a family was allowed to invest only Rs 7.5 lacs in the scheme. Now, the investment limit has been hiked to Rs 15 lacs per senior citizen (and not family). Effectively, a senior citizen couple can now invest Rs 30 lacs in total (earlier they could invest only Rs 7.5 lacs).
#5 Tax Benefit for Critical Illness under Section 80DDB Hiked to Rs 1 Lac
Now, senior citizens can take tax benefit for medical expenses on critical illnesses to the extent of Rs 1 lac per annum. Earlier, the limit was Rs 60,000 for senior citizens and Rs 80,000 for very senior citizens. Now, the limit for both is Rs 1 lac per financial year. For the taxpayers below the age of 60, the limit has been left unchanged at Rs 40,000 per annum. Note that you can take benefit only for such medical expenses which have not been reimbursed by your medical insurance.
#6 Interest Income up to Rs 50,000 Exempt from Tax for Senior Citizens
Additionally, for senior citizens, there shall be no TDS until your interest income exceeds Rs 50,000 in the financial year. This is much needed relief for senior citizens. Many of them rely on such interest income. Not only does this put more money in their hands, but it also saves them hassles running around banks to submit Form 15H. Note that this relief is available for deposits with banks, co-operative banks and post-offices. All kinds of deposits with these entities including savings accounts, fixed deposits, recurring deposits, Senior Citizen Savings scheme etc will come under the ambit.
A new Section 80TTB will be added. For TDS relief, relevant changes will be made to Section 194A. Do note this relief is only for Senior Citizens. For taxpayers less than the age of 60, there is limited relief of Rs 10,000 (only for savings account interest). Those senior citizens who have availed tax benefit under Section 80TTB can’t take relief under Section 80TTA. Makes sense too.
#7 Long Term Capital Gains (LTCG) on Sale of Equity/Equity Shares Are Now Taxable
This is a big setback for many investors. Till now, long term capital gains (holding period > 1 year) on sale of listed shares and equity mutual fund units was exempt from tax. Not any more. The Finance Minister has proposed to tax such long term capital gains at 10% without the benefit of indexation. However, no such tax needs to be paid if such LTCG is less than Rs 1 lac for the financial year. Additionally, gains accrued till January 31, 2018 shall be grandfathered. This means, while calculating your tax liability, purchase price will be higher of (Your actual purchase price, Highest price on January 31, 2018). This is applicable for all share sales after April 1, 2018.
Tax on Short term capital gains remains unchanged at 15%.
#8 Dividend from Equity Mutual Funds Is Now Taxable
Earlier, the dividend from equity mutual funds was exempt from tax. Now, AMCs will deduct Dividend distribution tax (DDT or TDS) of 10% before making you the dividend payment. Effectively, the AMC pays the tax on your behalf but it comes form your money only. Investing in dividend schemes of mutual funds, anyways, did not make much sense to me (barring a few exceptional cases). However, with Rs 1 lacs of tax shelter for growth schemes (as mentioned in the previous), growth option is much more advantageous. To read about this topic in greater details, suggest you go through this post.
#9 Tax Relief for LTCG Now Restricted
You can save long term capital gains tax by investing in NHAI and REC bonds under Section 54EC. Earlier, you could do this for all kinds of capital assets. Now, you can use the relief only for gains made from sale of land or building. Moreover, the maturity of bonds has been increased from 3 years to 5 years.
Note: Please understand this post is based on my interpretation of Budget speech and my reading of Finance Bill. Additionally, these rules will come into force from April 1, 2018 (and this financial year). This is under the assumption that the Finance Bill is passed without amendment by the Parliament. You are advised to consult a Chartered Accountant before taking any decision.