The Hindu Business Line : Welcome relief to individual taxpayers

The Finance Minister, Mr P. Chidambaram, has provided the much expected relief in the personal income taxes. It is pertinent to note that though there is no change in the individual tax rates, the tax liability for individuals will reduce owing to a higher threshold exemption limit and revised income slabs.

The proposed slabs of income and tax rates are as under: Up to Rs 1,50,000 — Nil; Rs 150,001 to Rs 300,000 — 10 per cent; Rs 300,001 to Rs 500,000 — 20 per cent; Rs 500,001 and above — 30 per cent

The threshold of exemption for resident women below the age of 65 has been enhanced to Rs 1,80,000 (from Rs 1,45,000) and for senior citizens to Rs 2,25,000 (from Rs 1,95,000). The levy of surcharge (10 per cent) on income exceeding Rs 10 lakh; and levy of education cess (2 per cent) and higher education cess (one per cent) on tax and surcharge will continue as present. Broadly, the above change in slabs of income will result in saving of Rs 4,000 to Rs 45,000 (approximately) depending upon the income levels of the individual tax payer.

Impact: This will leave more disposable income in the hands of the individuals, which will lead to increase in consumption and/or savings. This in turn will boost the overall economic activity.

Short Term Capital Gains

Short Term Capital Gains arising from the transfer of equity shares or units of equity-oriented mutual funds listed on an Indian Stock Exchange are proposed to be taxed at 15 per cent (as against 10 per cent) plus surcharge and education cess.

Impact: Generally, the retail investors invest for a relatively longer duration. It is important to note that there is no long-term capital gains tax in case shares are held for more than 12 months and where Securities Transaction Tax is paid. Further, even in case of short-term capital gains, the increase in tax is not very significant. Therefore, this should not have a major impact on the individuals.

Two new additions

In addition to the existing investment options such as PPF, infrastructure bonds, bank fixed deposits, etc, for the purpose of claiming deduction under Section 80C (subject to a maximum limit of Rs 1,00,000), an individual now has the option of also investing under the Senior Citizens Savings Scheme or under a five-year term deposit under the post office term deposit rules.

Impact: This will provide more choice to individuals in terms of tax saving investments, especially to senior citizens

Medical insurance

Currently, individuals can claim deduction up to Rs 15,000 in respect of Mediclaim Insurance Premium for self, spouse, dependent children and dependent parents. Under Budget proposal, this limit has been enhanced such that the deduction can now be claimed for premium of up to Rs 15,000 for self, spouse and dependent children and further Rs 15,000 for parents. Where a parent is a senior citizen the limit gets further enhanced to Rs 20,000.

It is important to note that to claim the additional deduction it is now not necessary that the parent should be a dependent parent (unlike the present provisions).

Impact: This will encourage individuals to take medical insurance policies for their parents, which will in turn give boost to health insurance sector and indirectly help further develop medical facilities in the country, due to access to the medical facilities with these medical policies.

Reverse mortgage

In relation to transactions under reverse mortgage scheme, under which senior citizens can mortgage their capital assets (generally the house) and obtain a loan, it has been clarified that the mortgage of the capital assets will not be considered as a transfer for the purposes of capital gains i.e. it will not be subject to capital gains tax at the time of mortgage of the property.

Therefore, capital gains tax liability will arise only at the point where the mortgage property is alienated (generally, when it is sold) by the mortgagee (housing finance company/bank) for the purpose of recovering the loan.

Further, it has been clarified that the receipt of loan either in lump sum or in instalment will not be considered as income in the hands of the individual.

Impact: This is a much needed clarification which will settle the ambiguity, if any, in respect of taxability of reverse mortgage loans. This will further help to launch these schemes by different banks, which had been put on hold for want of clarifications as to the taxability.

FBT recovered

The Central Board of Direct Taxes (CBDT) had earlier clarified that where Fringe Benefit Tax (FBT) on ESOPs is paid by the employer and recovered from the employee, it shall be deemed that the employee has paid the FBT. Therefore, such employees can claim credit for this deemed payment of FBT in a foreign country.

The above clarification is now proposed to be incorporated as part of the provisions of the Income-tax Act, 1961 itself. It is, however, also clarified that any such deeming will not allow the individual to claim credit for such FBT against his other personal income and/or claim a refund from the tax department on that account.

Impact: Being part of the statute will help individuals (especially globally mobile employees), strengthen their claim to avail tax credit in foreign country. Even though there were many more items in the individual’s wish list, nevertheless, the above relief in tax slabs and other clarifications will help the individuals feel happy and cheer the Budget 2008.

(The author is Executive Director, KPMG.)