Personal taxation- Finance Bill, 2018

On February 1, 2018, Shri Arun Jaitley, Hon’ble Minister of Finance presented Budget 2018-19. Budget 2018 is a big step towards achieving ease of business and ease of living- with agriculture, rural India and healthcare being the main focus of the Budget. The article discusses the changes introduced by the Finance Bill, 2018 on personal taxation. All the proposals discussed below will be effective from financial year 2018-19.

Introduction of an additional cess

Budget 2018 proposed no changes in the tax rates, however, ‘education cess on income-tax’ and ‘secondary and higher education cess on income-tax’ aggregating to 3% has been replaced with ‘health and education cess’ at the rate of 4% of income-tax including surcharge, wherever applicable. As per the Finance Ministry, this will enable them to collect an estimated additional amount of INR 11,000 crores. This amendment will result in an additional burden on individuals of 1% of the amount of income-tax (including surcharge) payable.

Introduction of standard deduction

Section 16, inter-alia, provides for certain deduction in computing income chargeable under the head ‘Salaries’. Budget 2018 introduced a standard deduction of INR 40,000 in lieu of transport allowance of INR 19,200 and medical reimbursement of INR 15,000. On account of Government providing the standard deduction, the individual assessee is not required to furnish any evidence for claiming such a deduction. Transport allowance for taxpayers who have specified disability would continue to be exempt. Apart from reducing paper work and compliance, this will help middle class employees in reduction of their tax liability, i.e., a reduction of taxable income by INR 5,800.

Enhancement of limits for senior citizens

Section 80D, inter-alia, provides that a deduction upto INR 30,000/- will be allowed to an assessee, being an individual or a Hindu undivided family, in respect of payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen, or medical expenditure in respect of very senior citizen. The Finance Bill, 2018 propose to amend Section 80D so as to raise this monetary limit of deduction from INR 30,000 to INR 50,000. Also, Budget 2018 eliminates the concept of ‘a very senior citizen’. The deduction will now be available to all senior citizens, including the deduction for medical expenditure incurred.

In case of single premium medical insurance policies, the deduction of premium paid will be allowed over the period of the policy, subject to aforesaid limit. Also, in case of senior citizens, the deduction limit for expenses incurred on specified diseases/critical illness has been proposed to be enhanced to INR 100,000.

Further, in case of taxpayers above the age of 60 years, the Government has increased the exemption on interest income from INR 10,000 to INR 50,000.

New regime for taxation of long-term capital gains (LTCG) on sale of equity shares etc.

Under the existing regime, long-term capital gains arising from transfer of long-term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of business trusts, is exempt from income-tax under Section 10(38). However, transactions in such long-term capital assets carried out on a recognised stock exchange are liable to securities transaction tax (STT). As per the Finance Ministry, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions.

In order to minimise economic distortions and curb erosion of tax base, Budget 2018 proposes to withdraw the exemption under Section 10(38) on LTCG on transfer of listed equity shares or units of an equity oriented mutual fund or unit of business trust. In accordance with the amendments proposed, LTCG arising from sale of equity shares of a company or a unit of an equity oriented fund or unit of business trust on or after April 1, 2018, in excess of INR 1 lac will be taxable in the following cases:

·        In case of equity shares, where STT has been paid on acquisition and transfer of such equity share

·        In case of unit of an equity oriented fund or unit of a business trust, where STT has been paid on transfer of such unit

In the above cases, the tax will be levied at the rate of 10% without benefit of indexation or foreign currency fluctuation. However, with a view to grandfather gains notionally realised by investors’ upto January 31, 2018, it has been provided that taxable gains will be determined using the higher of:

(a)   actual cost of acquisition; or

(b)  lower of sale price and FMV on January 31, 2018 (being the highest price quoted on the stock exchange in case of listed securities or net asset value in case of a unit which is unlisted).

Benefit of indexation of cost will be available where shares unlisted on January 31, 2018 are listed on date of transfer which happens on or after April 1, 2018. LTCG on sale of shares or units before March 31, 2018 will continue to be exempt under the existing provisions.

The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains. Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains. Also, Budget 2018 empowers the Government to notify transactions on which payment of STT is not required and which will be eligible for 10% tax on LTCG.

Tax free withdrawal from National Pension System extended to non-employee subscriber

In Budget 2018, the exemption in respect of 40% of the total amount payable to the taxpayer on closure or opting out by an employee contributing to National Pension System has been extended to non-employee subscribers.

Concluding remarks

The Finance Bill, 2018 provided only a marginal relief on personal taxation front except in case of senior citizens, wherein the Government has provided some key benefits considering their medical needs and their current savings for their future need. Stating the words of Shri Arun Jaitley in his budget speech- “A life with dignity is a right of every individual in general, more so for the senior citizens. To care of those who cared for us is one of the highest honours.”, The amendments clearly depict the Government’s intention to provide a dignified life to the senior citizens. However, other citizens of the country were also expecting some relief in taxation which seems to have missed the attention of the policy makers.