The Hindu Business Line : It’s less taxing times for the salaried

Come end-February, and stock market investors turn cautious, corporate captains keep their fingers crossed; and the common man sits tight, all in anticipation of the Union Budget. This year, it was no different. Only that there was large-scale speculation that the Budget would be particularly generous as this was perceived as a ‘pre-election’ Budget.

And the Finance Minister, Mr P. Chidambaram, did not disappoint. As the proposals were unveiled, it was clear that the common man was among the major winners; especially on the taxation front.

Old rates, new slabs, great savings!

From April 1, 2008, your annual income up to Rs 1,50,000 will now be exempt from tax, way up from the existing limit of Rs 1,10,000. If you earn anywhere between Rs 1.5 lakh to Rs 3 lakh, you will need to pay only 10 per cent of your earnings as taxes. In this bracket, you can save anywhere between 60 and 75 per cent of the taxes you now pay.

Are you in a higher slab? Don’t panic. You are still amply rewarded. Income in the Rs 3-5 lakh bracket will now be taxed at 20 per cent, ensuring a saving of 45-60 per cent from the tax you are currently paying. What is more, the 30 per cent tax rate will now apply only if your income exceeds Rs 5 lakh, far away from the Rs 2,50,000 threshold that is applicable currently.

If you are from the fairer sex, the regime has become friendlier. Your exemption limit has now been raised to Rs1,80,000. At an annual income of Rs 3,00,000, you will save around Rs 24,000 in taxes. At an income of Rs 5,00,000, you will save nearly double that sum, at Rs 45,000. An income a little higher than the Rs 10,00,000 limit will help you save almost Rs 50,000 by way of taxes.

For seniors, who are 65 years or older, it doesn’t get better than this. Their basic exemption limit has been raised to Rs 2,25,000. This will help them save almost Rs 20,000 at the Rs 3 lakh level and almost Rs 40,000 at the Rs 5-lakh income level.

Hurrah for compliance!

Surcharge remains: The slabs for tax rates have been changed but there is no such luck for the surcharge on income tax. The rate of surcharge which is presently at 10 per cent if the total income exceeds Rs.10,00,000/- will remain as such. The additional surcharge of 2 per cent and the education cess of 1 per cent, which is presently levied, are proposed to be continued next year.

Greater clarity on reverse mortgage

The Finance Minister had in his Budget speech of 2007 mentioned a scheme of reverse mortgage, which would provide a stream of income from property for owners who resort to ‘reverse mortgage’. This was meant mainly for senior citizens, who could borrow against their homes and receive the loan amount in the form of regular monthly payments from the lender.

But, here began the conflict. Is this transfer a ‘transfer’, as defined under Section 47 of the Income-Tax Act. If yes, would it not attract capital gains tax?

Section 47 of the Income-Tax Act, now provides that certain transactions such as gift, inheritance, and so on, of a capital asset will not be regarded as a transfer. Reverse mortgage schemes have now been included in this category of exemptions. This would mean that no capital gains tax will be imposed where such transactions take place.

Further, it also proposed to bring a new provision to provide that the amount received as a loan either in lump-sum or in instalments in a transaction of such reverse mortgage will not be chargeable to tax.

Sec 80-C becomes senior-friendly

To the list of items such as PPF contributions and payment of insurance premia that now find mention in Section 80C, the Senior Citizens Savings Scheme Rules, 2004 and five-year time deposits under the Post-Office Time Deposit Rules have been added. This is likely to provide a big fillip to the tax saving options available to senior citizens as, previously, the Rs 1,00,000 limit for tax-savings remained unexhausted because of the non-availability of options that served the purpose of savings as well as a regular stream of income.

It must be noted that if such amounts deposited are withdrawn within five years from the date of deposit, the amount withdrawn will be taxed as part of the income of the year of withdrawal. An exception is, however, proposed to be made where the amount is withdrawn after the death of the depositor, by the legal heir or nominee. The interest, which has already been taxed, will not be taxed on such withdrawal.

More benefits for medical insurance

Section 80D at present provides for a deduction on medical insurance premium paid, with a deduction available in respect of the premium of a sum not exceeding Rs 15,000. Where the insurance is for the health of a senior citizen, the deduction can be for a sum not exceeding Rs 20,000. This deduction is available to individuals where the insurance is for the health of such individual, the spouse of such individual and his dependant parents or dependant children.

This Section will now be amended to provide that the deduction would be available for up to a maximum of Rs 15,000. There is also a further deduction of up to Rs 15,000 where the insurance is taken for the health of the parent/s of such individual. It is further proposed that if the parents are of the age of 65 or above, the deduction would be allowed up to Rs 20,000 instead of Rs 15,000. Let us understand this with the example of Raj, who pays medical insurance premium as under:

Rs 12,000 to keep in force an insurance policy on his health and on the health of his wife and dependent children;

Rs 17,000 to keep in force an insurance policy on the health of his parents.

Under the proposed new provisions he will be allowed a deduction of Rs 27,000, if neither of his parents is a senior citizen. However, if either of his parents is a senior citizen, he will be allowed a deduction of Rs 29,000.

Summing up

Overall, salaried taxpayers and senior citizens, apart from farmers, appear to be the key beneficiaries of this Budget. After focussing on the investment side of the economy to drive growth in recent years, this Budget makes a clear attempt to jumpstart consumption.

Lower personal tax rates for the salaried class and the host of measures directed at rural India do promise to free up a substantial surplus in the hands of the consumer. Hopefully, this should find its way back into the economy in the form of higher spends on a range of consumer goods and services; or a higher surplus that can be invested in the capital market.

(T. Banusekar is a Chennai-based tax consultant.)

More Stories on : Income Tax | Budget | Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
HDFC Prudence: Invest

Divi’s Laboratories: Buy

JMC Projects: Buy

Infotech Enterprises: Hold

UTV Software: Hold

Index Outlook

Allcargo Global: Buy

It’s less taxing times for the salaried

Birla Sun Life Tax Relief: Invest