Budget 2017 : 15 Key Direct Tax proposals that You need to be aware of!

Indian Finance Minister, Shri Arun Jaitley has tabled the Union General Budget 2017-18 in the Parliament on 1st Feb, 2017. This year, both, the General Budget and the Railway Budget have been combined and presented as a single budget.

I have tried to list down some of the important Personal and Direct Tax proposals in this article.

These proposals are mainly related to Income Tax slab rates, Tax Rebate, Capital Gains, TDS (Tax Deduction at Source), Income from House property, Income Tax Return filing, NPS (National Pension Scheme) etc.,

Budget 2017 & Important Direct Tax Proposals

1. Income Tax Slabs & Rates for FY 2017-18 : The current Tax rate of 10% in the respective income slab has been reduced to 5%. The applicable Basic Exemption and Income Slabs as well as basic tax rates, are given in the below table;
   • If the total income exceeds Rs 50 Lakhs but below Rs 1 crore, a surcharge of 10% will be levied.
   • 15% surcharge on income tax if the total income is over and above Rs 1 cr.
2. Rebate under Section 87A: Tax rebate of Rs 2,500 for individuals with income of up to Rs 3.5 Lakh has been proposed.
   • Only Individual Assesses earning net income up to Rs 3.5 lakhs are eligible to enjoy tax rebate u/s 87A.
   • For Example : Suppose your yearly pay comes to Rs 4,50,000 and you claim Rs 1,50,000 u/s 80C. The total net income in your case comes to Rs 3,00,000 which makes you eligible to claim tax rebate of Rs 2,500.
   • The amount of tax rebate u/s 87A is restricted to maximum of Rs 2,500. In case the computed tax payable is less than Rs 2,500, say Rs 2,000 the tax rebate shall be limited to that lower amount i.e. Rs 2,000 only.
   • The Tax Assesse is first required to add all incomes i.e. salary, house income, capital gains, business or profession income and income from other sources and then deduct the eligible tax deduction amounts u/s 80C to 80U and under section 24(b) (Home Loan Interest) to come up with the net taxable income.
   • If the above net taxable income happens to be less than Rs 3.5 lakhs then the tax rebate of Rs 2,500 comes in to the picture and should be deducted from the calculated total income tax payable.
3. TDS
   • If you are claiming HRA (House Rent Allowance) of more than Rs 50,000 per month (or) paying rent which is more than Rs 50,000 then the tenant has to deduct TDS @ 5%. It has been proposed that the tax could be deducted at the time of credit of rent for the last month of the tax year or last month of tenancy, as applicable.
   • TDS on Commission payable to individual insurance agents has been removed, subject to their filing a self-declaration that their income is below taxable limit.
   • This rule is w.e.f June, 2017.
4. Long Term Capital Gains & Holding period : Holding period for Long term capital gain for all immovable properties has been reduced to 2 years from 3 years.
5. Base Year & Indexation :  The base year for calculation of Indexation is going to be 2001. It will have an affect (mostly positive) on investments where indexation benefit is available when calculating Capital gain taxes.
   • For example: Suppose you are holding on to your investments made in debt funds or Property before 2001, the Fair Market Value (NAV) as on 1 st April, 2001 will be considered as cost of acquisition for calculating capital gains. This will help the investor to reduce the capital gains taxes.
   • As of now, the base year is 1981. To calculate the capital gains at the time of selling any property purchased before 1981, its purchase price is now calculated on the basis of the fair market value of 1981. Calculation at the fair market value of 2001 will increase the cost of acquisition and lower the capital gain.
6. Loss on House Property :
   • Tax benefit on loan repayment of second house will be restricted to Rs 2 lakh per annum only (even if you have multiple house the limit is still going to be Rs 2 Lakh only and the ceiling limit is not per house property).
   • The unclaimed loss if any will be carried forward to be set off against house property income of subsequent 8 years. In most of the cases, this can be treated as ‘dead loss‘.
   • I believe that this is a major blow to the investors who have bought multiple houses on home loan(s) with an intention to save taxes alone.
   • As of now (till FY 2016-17), interest paid on your housing loan is eligible for the following tax benefits ;
     • Municipal taxes paid, 30% of the net annual income (standard deduction) and interest paid on the loan taken for that house are allowed as deductions.
     • After these deductions, your rental income can be NIL or NEGATIVE and is called ‘loss from house property’ in the latter case.
     • Such loss is currently allowed to be set off against other heads of income like Income from Salary or Business etc. which helps you to lower you tax liability substantially.
7. NPS Contributions & Withdrawals :
   • It has been proposed that a contribution of up to 20% of the gross income of a self-employed individual (individual other than the salaried class) can be deducted from the taxable income under Section 80CCD (1) of the Income Tax Act, 1961, as against current 10%.
   • It has been proposed that a tax exemption on partial withdrawal not exceeding 25% of the contribution made by an employee will be provided. This amendment will take effect from April 1, 2017 (AY 2018-19 onwards).
8. RGESS : Tax Benefits of Rajiv Gandhi Equity Savings Scheme (RGESS) under section 80CCG has been withdrawn.
9. Section 54EC Bonds : Govt may notify more bonds eligible for section 54EC exemption. Currently, investment in bonds issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited are only eligible for exemption under this section. (Read : ‘How to save Capital Gain taxes on sale of property?‘)
10. Filing of Income Tax Returns :
    • A Proposal has been made to have one page Income Tax Return Forms for the category of individuals having taxable income up to Rs 5 lakhs other than business income.
    • Time limit for filing of Revised Return : It has been proposed to reduce the time period for revising a tax return to 12 months from completion of financial year.
11. Income form Dividends : As per Budget 2016, income by way of dividend in excess of Rs 10 lakh is chargeable at the rate of 10% for individuals, Hindu Undivided Family (HUF) or partnership firms. This has now been extended to Private Trusts / Family trusts.
12. Shares & LTCG tax : Exemption of Long Term Capital Gains Tax u/s. 10 (38) available only if acquisition of share is subject to STT (except cases like IPO, bonus issue, rights issue etc.,).
13. Books of Accounts : In order to reduce the compliance burden of Individuals and HUF’s carrying on business or profession, it has been proposed to increase the monetary limits of income from Rs. 1.2 Lakh to Rs. 2.5 Lakhs and total sales or turn over or gross receipts from Rs. 10 Lakhs to Rs. 25 Lakhs for maintenance of books of accounts.
14. Donations & Section 80G : The limit of deduction under section 80G of the Act for donations made in cash has been proposed to be reduced from current Rs 10,000 to Rs 2,000 only.
15. Cash Transactions & Penalty :
    • A ban on cash transaction of more than Rs 3 lakh has been proposed in the Budget for 2017-18. (Latest update : 23-Mar-2017, Govt is now proposing to reduce cap on Cash Transactions from Rs 3 Lakh to Rs 2 Lakh)
    • As per Budget document : “no person shall receive an amount of Rs 3 lakh or more by way of cash in aggregate from a person in a day; in respect of a single transaction; or in respect of transactions relating to one event or occasion from a person.”
    • The Budget proposes to levy 100% penalty on a person who receives Rs 3 lakh and above in cash. So, it is the receiver who has to bear the penalty.
    • For example : If you buy an expensive watch for cash worth Rs 5 Lakh, it is the shopkeeper who will have to pay the tax (penalty) of Rs 5 Lakh.

I hope you find this post informative and useful. If I have missed out any other important tax proposal(s), kindly share those details in comment section below. Thank you!

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on 06-February-2017)