The Annual Union Budget is most awaited every year and as citizens, we look forward to benefits from the government in the form of tax concessions. This year’s budget is surely Senior Citizen’s budget with a bouquet of benefits given specifically to them. A big major change impacting several investors is the change in long-term capital gain tax. A boost to real estate with a change in circle rate definition impacting capital gains taxation, a move towards greater transparency by making TDS provisions applicable to charitable trusts, expansion in the definition of dependent agent, govt now proposes to tax “economic presence” in India of Non-Residents.
While The devil is in the details and its tail packs a punch! Not much mentioned anywhere is the punch- withdrawal to chapter VI deductions if the assessee does not file income tax return by due date nails it for everyone!
So let us understand few key proposals of The Budget 2018:
RETURN OF STANDARD DEDUCTION
This is not a new provision and was stopped by the government earlier. The budget has proposed to provide a standard deduction of Rs 40,000 from salary income to employees w.e.f 1.4.2018. However, at the same time also proposed to take away existing annual transport allowance of Rs 19,200 and Rs15,000 medical reimbursement. So need to collect those bills for reimbursement any more. Prima facie income exempted from tax after setting off the gain and loss comes to only Rs 5800. It will have a nominal impact on most salaried persons. However, with the increase in education cess from 3 to 4% it will eventually lead to more tax liability for employees in the higher tax bracket.
However, this provision will benefit many employees who were earlier getting flat salaries especially junior employees working in the unorganised private sector. Also, Pensioners will get this standard deduction, another benefit for senior citizens, they were not getting any medical reimbursement or transport allowance and will reduce their tax liability.
Much awaited, The Budget has many benefits for Senior Citizens:
|Area of gain||Existing 2017-18||From 2018-19 onwards|
|Bank Interest Income deduction||10,000 on bank saving bank interest and post office interest.|
|Rs. 50,000/- deduction on saving bank, fixed deposit, recurring deposit, and post office interest|
No TDS for this limit
|Health Insurance Premium|
|Exemption on medical expenditure for specific critical illness Section 80 DDB||Rs60,000/- for senior and Rs 80,000/- for super senior||Rs. 1,00,000/- for all|
|Pradhan Mantri Vaya Vandana Yojna||Rs 7.5 Lakh started in 2017 for one year. Till May 2018||Rs 15 lakhs until 2020|
INTEREST INCOME: In a welcome move, the tax exemption limit on interest income from bank savings deposits and post office schemes has been raised to Rs 50,000 from the existing Rs 10,000. It now also covers the interest income from fixed deposits and recurring deposits. This means that no tax will have to be deducted at source (TDS) on such income under Section 194A.
Given that post office schemes and fixed deposits comprise a big chunk of senior citizens’ retiral corpus, this will result in a significant rise in their savings if their income falls in the taxable bracket. It also implies that senior citizens who do not have a taxable income will not have to furnish Form 15H if they do not want tax deducted at source.
The LIC scheme, for seniors above 60 years of age, was started in 2017 for one year but has now been extended to March 2020. It offers an assured return of 8 percent for 10 years and is an attractive option for senior citizens despite it being taxed at maturity. Given that the Senior Citizen’s Savings Scheme is the only other plan that at 8.3 per cent, this scheme offers a return of 8 per cent and is a good option to invest in for the seniors who do not fall in the taxable bracket.
CHANGES IN CAPITAL GAINS TRANSACTION FOR PROPERTY
CIRCLE RATE FOR PROPERTY
Circle rates are state governments’ benchmark or reference property prices on which they calculate the stamp duty payable. They are also known as ‘ready reckoner’ or ‘collector rates’.
For example, according to the present practice, if a property being sold is valued at Rs 10 million, but the circle rate is Rs 10.05 million, the buyer has to pay tax on Rs 500,000 based on his slab rate. An individual in the 30 per cent tax bracket pays Rs 150,000 in tax. The difference is considered as a ‘profit’ for the buyer under section 56(2) of the Income-tax Act.
However, according to the Budget proposal, he will not need to pay any tax in case the variation is up to 5 percent.
A seller needs to calculate his capital gains on the basis of the price considered for stamp duty under section 50C. Now, the seller’s tax liability will be slightly lower. If the gains at present were, say, Rs 798,120. It would come down by Rs 100,000 (see table below).
The proposal will essentially benefit buyers and sellers in areas where property prices have seen a much higher correction in the past two-three years. “If you look at Gurgaon in Delhi-NCR, prices in some localities are still below the government’s benchmark rates, despite the state government lowering the circle rates in the past two years.
CAPITAL GAINS BONDS
Currently, as per section 54EC of the Income-tax Act, exemption from long-term capital gains tax is available if the gains are invested in the specified asset of the section within six months of the date of sale.
The budget has proposed to increase holding period of bonds under section 54EC from three years to five years.
In addition to that, the budget has also proposed to restrict the definition of a capital asset to only land and building under the said section.
This means that tax on capital gains arising from the sale of long-term capital assets such as plants, machinery, bonds or unlisted shares etc. will now no longer be exempt under the said section except for land and building.”
Most people, in order to avoid the tax on LTCG arising from the sale of their house, invest in the bonds of Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI) or any other bonds as notified by the Central Government. The maximum limit for investing in these bonds is Rs 50 lakh. Currently, the interest paid on these bonds 5.25 percent per annum.
CHANGES IN LONG TERM CAPITAL GAIN TAX
Finance Minister Arun Jaitley, in his Union Budget speech, re-introduced LTCG tax on stocks. Investors will have to pay 10 percent tax on profit exceeding Rs 1 lakh made from the sale of shares or equity mutual fund schemes held for over one year. Till now, LTCG was exempt from tax. The definition of a long-term investor in stocks for tax purposes is one year. LTCG tax on stocks was scrapped in 2004-05 by then finance minister P Chidambaram.
The attractiveness of equity compared to debt funds stands eroded because its tax advantage is now gone. While LTCG tax is 10% without indexation for equities, it is 20% for debt funds with indexation benefit.
Tax on long-term capital gains on stock market transactions
The Budget proposes to withdraw the exemption on long-term capital gains (LTCG) arising on transactions in listed equity shares, equity-oriented mutual funds under section 10(38) of the ITA and units of business trusts.
It is further proposed to introduce section 112A of the ITA to tax the same from FY 2018/19 (i.e. transfer of shares/units from 1 April 2018 onwards). As per proposed section 112A of the ITA, LTCG tax is to be levied at 10% (plus applicable surcharge and cess) on capital gains exceeding INR 100,000.
The shares/units are considered as long-term capital assets when the holding period is 12 months or more.
A concessional 10% rate would be applicable when
- in the case of shares, securities transaction tax (STT) is paid both at the time of the acquisition and the transfer of shares; and
- in the case of equity oriented mutual funds/units of business trusts, STT is paid on the transfer of such asset.
- STT is a tax levied on transaction value and collected by the stock exchange on eligible transactions.
Addition of Grandfathering Clause in LTCG-
The ‘Grandfathering’ clause is a special provision by which any entity can be exempted from a new law, rule or regulation. This means the regulations would continue to apply in certain cases in the future. grandfathering has been extended to people till a set time — January 31, 2018.Hence, any gains made up to January 31 will not be taxed as they have been grandfathered.
However, gains made in the future, or beyond that specified date will be taxed according to the new LTCG tax regime.
Review the chart as published in Budget Analysis in Economic Times Newspaper for better understanding. It explains it all
Also, though the grandfathering clause provides some relief, it has also made things difficult. “The highly technical construct of the amendment seeking to grandfather the appreciation in the value of the stocks and mutual fund units up to 31 Jan 2018, has made things complex for investors and fund managers
Investors, however, can now exercise greater freedom when it comes to redeeming their equity investments. As the difference between LTCG and STCG is 5%, investors who had wait for an entire year just to avail of the tax benefits, even if they wanted to book profits earlier, won’t have to stay invested. On several occasions, waiting for an entire year has proved to be costly for investors. Investment decisions will now be based on the market situation and not based on tax concerns.
To improve transparency and accountability, few new measures introduced:
Applicability of TDS PROVISIONS
- There are no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act.
- This has led to lack of an audit trail for verification of application of income.
Section 11 provides for exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions.
It is proposed to insert a new Explanation to the said section so as to provide that for the purposes of determining the amount of application under clause (a) or clause (b) of sub-section (1) thereof, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
Non-deduction of tax at source would now attract disallowance in the hands of the charitable trust also. Thus, now trusts will be mandatorily required to deduct TDS as per provisions of Chapter XVII-B of the Act to claim expense as the application of Income. Else the same will be taxable in the hands of Trusts.
Disallowance of Expenditure Exceeding Rs. 10,000/- in Cash:
The provisions of section 40(3) and 40(3A) will be mutatis mutandis apply to the Trusts. Earlier, charitable trusts were availing benefits even in respect of the application of income by way of cash payments.
This proposed amendment is again in line with the dream of digital India and cashless economy.Thus, payment exceeding Rs. 10,000 in cash will not be considered as the application of income and the same will be taxable in the hands of trusts.
AMENDMENT IN THE DEFINITION OF DEPENDENT AGENT
Expansion of scope of “business connection” for taxation of non-residents The Indian Income Tax Act (ITA) provides for taxation of income of non-residents in India where the income is deemed to accrue in India as per section 9. Section 9 of the ITA provides that income is deemed to accrue in India if a non-resident has a “business connection” in India.
Under the existing provisions of explanation 2 to section 9(1)(i) of the ITA, a “business connection” includes business activities carried on by non-residents through dependent agents.
Definition of dependent agent has changed
There is a drafting change in the law. This is one of the anti-evasion measures. The provision said you must be habitually concluding contracts on behalf of his clients. Then he only signs on behalf of his client. Over time, we found that the agent is doing everything, but contract signing was happening in Dubai or America and since the final contract was signed outside India, it could not be brought to taxation in India. So, now govt. is changing the definition to say that dependent agent is one who has principal role leading to the conclusion of the contract. Govt. also has an international obligation as this definition is also there in Multilateral Instrument.
It is further proposed that the scope of a business connection be expanded to include a “significant economic presence”.
A significant economic presence for this purpose shall mean any transaction in respect of any goods, services or property carried out by a non-resident in India, including a provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. This clause will bring many companies who do not have any permanent establishment in India nor any agent in India but are able to conduct business through digit media and internet under the tax net as they get covered under “significant economic presence” clause.
COMPUTATION OF BUSINESS INCOME TO BE DONE FOLLOWING THE DISCLOSURE STANDARDS OF ITA
Computation and Disclosure Standards (ICDS) Section 145(1) of the ITA provides that the income under the head “Profits and gains of business or profession” and “Income from other sources” is to be computed in accordance with the cash or mercantile system of accounting regularly followed by the taxpayer.
Further, section 145(2) of the ITA authorizes the Indian Central Government to notify ICDS to be followed by any class of taxpayers or in respect of any class of income.
Entrepreneurs need to follow the computation and disclosure guidelines as laid down by the Income Tax Act.
The Central Board of Direct Taxes (CBDT) has notified 10 ICDS vide notifications, dated 29 September 2016, which are effective from FY 2016/17. ICDS are applicable for computation of income chargeable under the head
- “Profits and gains of business or profession” or
- “Income from other sources” and not for the purpose of maintenance of books of accounts.
ICDS cover various topics like:
- accounting policies,
- valuation of inventories
- construction contracts,
- revenue recognition,
- tangible fixed assets,
- effects of changes in foreign exchange rates and government grants.
The Indian Finance Bill 2018 proposes various amendments to the ITA in order to preserve the ICDS. It introduces, inter alia, specific provisions on the allowability of marked-to-market losses, taxation of retention money in construction contracts, recognition of income from construction contracts under the percentage completion method and a bucket valuation approach for listed securities, in view of the observations of the Indian High Court.
Section 145(2) of the ITA was amended in 2014 to enable notification of ICDS. If the taxpayer does not compute his income and tax liability according to ICDS so notified, the tax officer can disregard the accounts and complete the audit to the best of his judgement under the provisions of section 144 of the ITA.
DIVIDEND DISTRIBUTION TAX ON DIVIDEND PAYOUTS TO UNITHOLDERS IN AN EQUITY-ORIENTED MUTUAL FUND
It is proposed to amend section 115R of the ITA, which relates to tax on distributed income to unitholders, to provide that, where any income is distributed by a Mutual Fund, being an equity-oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of 10% on income so distributed.
This amendment will take effect from 1 April 2018. Dividend distribution tax is also levied on dividends distributed by Indian companies.
10.PROPOSAL FOR ENABLING PROVISION FOR EXPANDING E-INVESTMENT. HOW WILL IT WORK?
What the govt has to say about it, says it all—”We wanted end-to-end e-assessment. We want to make sure there is no face-to-face contact between an assessee and a tax officer. There will be an assessment unit and a separate evaluation unit. Both will have 3-4 officers who will decide whether notice is to be issued or not. There will be a time stamp on each interaction from the issue of notice to the reply of an assessee. We have brought in enabling provision to bring e-assessment this budget. Hopefully, CBDT will work it out soon.”
FILE YOUR RETURN ON TIME TO AVAIL DEDUCTIONS UNDER CHAPTER VI
Tucked away in the fine print of budget 2018 is a proviso: if taxpayers – individual or corporate – forget to file their income tax returns by the due date, they will not be allowed to claim tax breaks on investments, children’s school fees and medical insurance premiums under the grab-all Section 80.
Chapter VI provides for tax deductions that cover specified savings, life insurance, medical insurance, pension fund investments, interest on housing loans, and a tax break for children’s education. As a result, the effective income slab eligible for zero tax works out to just over Rs 4 lakh.
The landmine clause sounds fairly innocuous: “It is proposed to substitute the said section so as to provide that in computing the total income of an assessee of the previous year relevant to the assessment year commencing on or after the 1st day of April, 2018, deduction under any other provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” shall be allowed only if the return is filed within the due date specified under sub-section (1) of section 139. This amendment will take effect from 1st April, 2018, and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.”
If you dawdle over filing your return, regardless of the reason, you will not only face penalties but also be denied tax exemptions.”
“Until the assessment year 2017-18, if anyone filed a tax return after the due date, he or she could get away by paying a small penalty. But now there is this draconian provision that kicks in from April 1, 2018, under which you will no longer be eligible for tax breaks under sections 80C, 80D (Mediclaim), 80TTA (savings bank interest), 80G which covers donations, etc if you miss the filing deadline.
We hope the article helps you in a better understanding of the proposed provisions.
Feature Image Source: Investors Clinic