The Union Budget covers almost all aspects of the economy, but nothing is more looked forward to than tax-related announcements. This is when the government announces changes in both direct and indirect taxes.
Let’s look at how the Budget changed tax rules this year:
1) Income Tax: This year’s Budget had no changes in the income tax slabs or the exemption limit. Instead, the Finance Minister proposed to increase tax rebate under Section 87A of the IT Act to Rs 5,000 from Rs 2,000 earlier. This is for individuals who earn less than Rs 5 lakh. This rebate is applied on your final ‘Income Tax’ liability. Meaning, if you have to pay tax of Rs 3,000, the rebate ensures you do not pay any tax at all. Suppose, the income tax payable is Rs 6,000, you will only have to pay Rs 1,000 in tax.
2) Presumptive tax: The government focussed on the small-scale businesses and entrepreneurs. This includes professionals, who do not earn a salary. Instead, they earn from services offered. This year, the Budget proposed to extent the Presumptive Taxation Scheme to professionals too along with small-scale businesses. All individuals who earn revenue up to Rs 50 lakh from services offered could calculate their taxable income to be 8% of their total revenue/turnover. This is a simplified way of calculation, and can lead to savings for such individuals. For companies, the Budget proposed to raise the limit to Rs 2 crore from Rs 1 crore earlier. This means, around 30 lakh additional companies could opt for the Scheme.
3) Corporate Tax: Small-scale companies have more to rejoice. Start-ups will have to pay no Income or Corporate Tax in the first three years. They will only have to pay MAT or Minimum Alternative Tax. Secondly, the Budget reduced Corporate Tax rate to 29% from 30% earlier for companies with turnovers less than Rs 5 crore. Lastly, the government wants to simplify the tax structure further. To do so, it will give new companies established after March 2016 the option to either be taxed at a rate of 25% or at the usual Corporate Tax rate. The difference is that companies cannot opt for any tax exemptions if they wish to be taxed at 25%.
4) Housing-related concessions: Housing got some of the biggest tax breaks this year. The Budget proposed three new tax concessions – two for individuals and one for realty developers. First-time buyers of houses worth up to Rs 50 lakh can get an additional exemption of Rs 50,000 on their loans premiums. This is in addition to the existing limit of Rs 2 lakh. All individuals can get a tax deduction of up to Rs 60,000. Currently, the limit is set at Rs 24,000. To encourage developers to build affordable houses, the Budget proposed to exempt all projects from service tax if they are building flats sized up to 60 square meters.
5) Dividend Distribution Tax: The government clearly wanted to increase its tax revenues to make up for its extra expenditure. For this, it turned to the rich. This reflects in the Budget proposal to tax dividends worth over Rs 10 lakh at the rate of 10% in the hands of the investor. This is in addition to the 28.84% Dividend Distribution Tax that the company or Fund pays. This change mainly affects institutional investors who hold portfolios worth crores of rupees.
6) NPS, EPF taxation changes: The Budget did not propose to tweak any tax rates on investments. It, however, announced two key changes for the National Pension Scheme (NPS) and the Employee Provident Fund (EPF) scheme. To stimulate investment in NPS, the government proposed to make 40% of the total withdrawals during retirement tax-free. This means, investors only have to pay tax on 20% of the withdrawal as only 60% of the corpus can be withdrawn in lump sum. Of course, any monthly payments will continue to be taxed as usual. Secondly, the Budget lowered the tax-free withdrawal limit to 40% from 100% for all superannuation funds and recognized provident funds like the Employees Provident Fund (EPF). This is only for new investments post April 2016. This means, if you withdraw 60% of your EPF investments after you retire, you will have to pay tax on 40% of the amount. Earlier, the whole amount was tax-free.
7) Indirect tax changes: The Budget announced multiple, but small, changes to indirect taxes like Service Tax, Excise Duty, Import Duty. Most of the hikes in taxes are on luxury goods like jewellery or cars. The quantum of hike, however, is low – just about 1%. Cigarettes too would attract higher Excise Duties by 10-15%. Insurance premiums, meanwhile, could get cheaper as the Budget proposed to exempt general insurance schemes from Service Tax. It also slashed the Service Tax on Single Premium Annuity policy premiums to 1.4% from 3.5%. The Budget also proposed to levy an across-the-board cess of 0.5% on all taxable services and products. This is to fund the rural development projects. Lastly, it proposed to abolish 13 cesses levied by various Ministries to simplify taxation. These are small-level cesses which only generate revenues less than Rs 50 crore.