What Union Budget 2016 has in Store for the Indian Taxpayer?

The much-awaited Union Budget 2016 is out. Let us look at some of the critical provisions of the Union Budget, which might affect your tax liabilities.

Withdrawal from EPF above 40%

This has been really the killer and stand-out provision in the entire Union Budget, as far as the salaried employees are concerned. In simple words, two basic changes proposed have been proposed:

• For the contributions made from April 1, 2016 in Employee Provident Fund (EPF), any excess of 40% of the corpus commuted and taken as a lump sum at the time of withdrawal will be taxable. Similar provisions have also been extended for the National Pension System.

• For the contributions made by the employer to EPF, the deduction of the expense will be restricted to Rs. 1.5 lakh. This provision, especially the first one, has received a lot of criticism from the general public. As a result, days after the Union Budget, the Government had to issue a clarification stating that the objective is to nudge the public to create a post retirement pension income stream in view of lack of other alternatives.

However, in the clarification Government has also assured to relook into the provisions, given the concerns, and it is hoped that instead of the full amount, only the interest portion of the corpus will be taxed. Final clarity on this provision is awaited however a complete rollback is also very unlikely.

As this provision stands now, it creates an advantage of NPS over EPF, given its flexibility and higher tax deduction. Also, given this taxation regime, interest may shift from voluntary provident fund (VPF) towards tax free bonds and other debt options. It needs to be mentioned here that notwithstanding the above proposals, tax provision of Public Provident Fund (PPF) remains unchanged.

On tax treatment of lump sum in case of NPS

Lack of clarity on National Pension Scheme has been one of the reasons for its low popularity till date. However, in this Budget, the Government has clarified the following points on the tax treatment of NPS:

• Any payment from the NPS Trust to an employee on closure of account or his opting out of the pension scheme referred to in section 80CCD, is exempt till 40% of the withdrawal corpus.

• Any lump sum paid out from the scheme, which is in excess of 40% will be chargeable to tax.

• Payment from an approved superannuation fund by way of transfer to the account of the employee under a pension scheme (referred to in section 80CCD notified by the Central Government) shall be exempt from tax.

Surcharge

Until now, people with total income of Rs. 1 crore and above were liable to pay a surcharge of 12% on the tax payable. This rate has now been increased to 15%.

Pollution Cess on purchase of vehicles

Cars have become costlier. With immediate effect, infrastructure cess has imposed at the time of registration of a new car.

• Petrol/LPG/CNG driven motor vehicles of length not exceeding 4m and engine capacity not exceeding 1200cc: 1 percent.

• Diesel driven motor vehicles of length not exceeding 4m and engine capacity not exceeding 1500cc: 2.5 percent.

• Higher engine capacity motor vehicles, SUVs and bigger sedans: 4 percent.

Following are exempt from the above rule: taxis, electrically operated vehicles, hydrogen vehicles based on fuel cell technology hybrid vehicles, cars for physically handicapped and ambulances.

Tax payable on purchase of new cars

For purchasing a car above Rs. 10 lakhs, the car dealer will also collect a 1% tax and deposit in the Government account in your name. You can claim the credit of this tax at the time of filing the tax return, though.

Service Tax Rates

A new cess by the name of Krishi Kalyan cess at the rate of 5% has been proposed to be applicable from June 1, 2016. This will take the existing service tax rate of 14.5% to 15%. Also, following services that were previously exempt from the service tax net will be taxable now:

• Services provided by an advocate to another advocate.

• Transportation of passengers by air-conditioned carriage.

• Construction and installation of original works pertaining to monorail or metro.

• Services of transport of passengers by ropeway, cable car or aerial tramway.

Tax Deduction for Rent

Though this Budget has not increased the tax slabs to keep up with inflation, the silver lining has been the increase in the tax deduction limit for rent paid by self-employed or salaried persons (who do not receive house rent allowance or HRA from the employer under Section 80GG of the Income Tax Act). Earlier, the maximum deduction was Rs. 2,000 per month, which has been now raised to Rs. 5,000 per month. For a self-employed person falling in 30% tax bracket, incremental tax savings due to this provision is a cool Rs. 11,124.

Construction timeline for tax deduction of interest

In case of under-construction properties, where the construction does not get completed within 3 years, the deduction of interest in case of self-occupied property under Section 24 of the Income Tax Act is restricted to Rs. 30,000 instead of Rs. 2,00,000. This takes away a major chunk of the tax benefit for the tax payer.

The provision has sought to be amended whereby the time frame of 3 years has been extended to 5 years. This provision will definitely come as a major relief to several assesses, who are stranded with delayed possession of their homes considering the current slowdown in the residential real estate market.

Tax deduction for first time home buyers

The existing Section 80EE, which provided for an increased deduction for home loan interest for first time home buyers, was expiring on March 31, 2016. This benefit is now proposed to be extended. Hence, people buying their first home on or after April 1, 2016 will continue to get Rs. 50,000 additional deduction on interest paid, and this is proposed to be continued throughout the repayment tenure of the loan.

However, it comes with certain conditions, such as the value of the house and the amount of loan taken loan should be maximum Rs. 50 lakhs and Rs. 35 lakhs respectively. In view of this condition, only people in tier II and III cities will be able to get benefit of this section. This is because it is difficult to find suitable options below Rs. 50 lakh ticket size in bigger cities, given the high real estate prices.

Presumptive scheme of taxation

As per the present provisions of tax law, certain businesses are taxed under a presumptive scheme of taxation (i.e. at a certain rate of gross receipts). The maximum limit of turnover to qualify for this scheme has been raised from Rs. 1 crore to Rs. 2 crore. This will benefit a big section of small businesses that can now pay a flat tax on 8% of the gross turnover.

Also, the scheme is now extended to professionals by way of a new Section 44ADA. Now for anyone who is a resident in India and is engaged in specified professions (i.e. legal, medical, technical consultancy, accountancy etc.) and whose total gross receipts do not exceed Rs. 50 lakhs, 50% of the receipts will be considered business income and will be taxable.

A simplified three page income tax return form has been prescribed for such cases (ITR 4S) as against a very complex ITR 4. This provision is a great relief for entry level professionals who need not get into the hassle of income computation as per the tax provisions.

Tax relief for small taxpayers

There is an existing tax relief under section 87A, wherein a deduction is available from the tax payable upto Rs. 2,000. In this Budget, this relief has been increased to Rs. 5,000. Though this is a small tax relief, it will impact a lot of small taxpayers.

Conclusion

Amidst global slowdown and uncertainty, different sections of the society – from the common man to the corporates – depended on the Budget proposals this year. While this time’s Budget has been categorized as pro-rural and pro-poor, very little has been offered to the corporate. From a common man’s point of view, while the Budget does not dole out the usual goodies like increase in tax slabs etc. but this time, the focus has been more on tax administration reform and making life easy for the taxpayer.