| There is a serious disconnect in the system. Mumbai-based financial consultant Bimal Parekh says, "exemption levels do not reflect reality". The Rs 1.10 lakh tax baseline for individuals is out of sync with the cost of urban living. Some norms are almost antiquated. The stipulation to file audited returns for professionals earning fee income of Rs 10 lakh-plus is unchanged for the last 22 years as is the limit of Rs 40 lakh for small businesses. |
Personal Income Tax: Give and Take
Finance Minister P. Chidambaram believes his biggest gift to individuals is that they will have to pay income tax on earnings above Rs 1.10 lakh rather than Rs 1 lakh. He has eased the thresholds for women to Rs 1.45 lakh and senior citizens to Rs 1.95 lakh. Despite all the effort, the maximum saving is expected to be a mere Rs 1,000 per year. But he has also, at the same time, jacked up the education cess payable on all taxes from 2 per cent to 3 per cent.
The net effect from the higher exemption threshold on the one hand and the additional tax burden of the cess on the other, will vary depending on income levels. Those with lower income will save very little on their net tax outgo, while high earners will end up paying more taxes (see graphic).
Medical insurance: Small Measure
Tax-payers will get to deduct from their taxable incomes medical insurance premiums up to Rs 15,000 instead of Rs 10,000 now. This limit is set to go up further to Rs 20,000 for those above 65 years. The tax relief is over and above the Rs 1 lakh deduction from taxable income already available for investments like life insurance policies and equity-linked saving schemes. Yet no one's clapping as annual premia tend to be way higher than the benefit provided.
Pensions: Small Benefit, Big Push
Contributions towards pensions amounting to 10 per cent of salaries by both the employers and the employees in the private sector will be totally tax free in the hands of both. The benefit comes in addition to the one already available for similar contributions to employee provident funds. Pension contributions for Central government employees are already tax-free.
Education Loans: New Lessons Learnt
Parents borrowing to fund the education of their children can expect fresh tax relief. Repayments of education loans by relatives of students will be allowed to be deducted from the income on which tax has to be paid. The benefit which can be availed for eight years and is over and above the Rs 1 lakh deduction from taxable income is currently provided to students.
Multiple Identity: Crisis Solved
You may soon be able to get rid of the hassle of multiple ids such as Permanent Account Numbers (pan) for filing tax returns, de-mat account numbers for holding your shares with depositories, unique client codes for buying and selling shares on stock exchanges and so on. The pan will be the sole identification number for participants in the securities markets.
Cash Withdrawal Tax: Loose Change
The 1 paisa tax per cash withdrawals of Rs 100 from bank accounts other than savings accounts is proposed to kick in on withdrawals above Rs 50,000 rather than Rs 25,000.
Infrastructure Bonds: Capped Benefits
Savings on capital gains tax stand capped. The only way right now to save the tax is to park the gains from property and other investments in infrastructure bonds such as those issued by the National Highways Authority of India and the
Rural Electrification Corporation. Investments above Rs 50 lakh in these investment instruments will no longer enjoy the exemption. The interest earned on them, however, continues to remain taxable.
Dividend Payout: More Tax, Less Dividend
Dividends paid out by companies and mutual funds could take a hit. The Budget proposes to raise the tax rate on them. Dividends which are taxable in the hands of the distributing company or mutual funds are proposed to be taxed at the rate of 15 per cent against the current 12.5 per cent.
The money market mutual funds will face higher flat rates of 25 per cent. Dividends paid by these funds are currently taxed at 15 per cent if paid to individuals and 20 per cent if handed out to companies.
Overseas Investments: Clarity for the Rich
Individuals can invest $50,000 per year overseas but there haven't been too many takers.The Budget proposes to enable investors to use the mutual funds route by easing rules. A move to make dedicated infrastructure mutual funds attractive is also on the anvil.
Art Investments: Colours of Profits
Those who have hopped on to the great Indian Art bandwagon would have to pay taxes at the rate of 10 per cent on the gains from the investment if the painting or sculpture is sold within 36 months of buying. Gains from sales after three years would attract tax at the rate of 20 per cent.
ESOPs: Now a Fringe Benefit
Companies will have to pay the Fringe Benefit Tax on the gains accruing to their employees on encashment of Employee Stock Options, putting the incentive mechanism at the risk of being discontinued.
Service Tax: Rent Seekers Beware
Rentals on commercial properties and services rendered by personal portfolio managers such as those hired by high networth individuals are to be brought under the service tax net.