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Two Deadly Budget 2016-17 Tax Proposals, and more

Yesterday, in the Union Budget, the Finance Minister Shri Arun Jaitley presented the tax proposals applicable from the Financial Year 2016-17 onward.

It contains two earth shattering announcements. If finally approved and passed, this budget will forever be remembered for these proposals.

Summarized below are the same; and other tax related announcements in the Union Budget for 2016-17.

1. About the tax on Dividend Income

Contrary to popular misconception, dividends are not tax free.

Presently, as per Income Tax Act, the companies deduct 15% as Dividend Distribution Tax (DDT) on the dividend declared on your equity shareholding in the company.

Sure, you don't have to pay any further tax on this dividend income.

This policy is now amended:

The Govt. feels that people with high dividend income are unduly advantaged. Those who receive income as dividend, pay only 15% tax. Whereas those receiving income in other forms, say salary, are taxed at 30%. This is particularly true in case of Promoters and High Net Worth Individuals.

To remove this "inequity", henceforth,
a) Companies will continue to deduct DDT @15% on the dividend payable
b) Those earning dividend income in excess of Rs.10 lakhs, will have to pay additional 10% tax on dividend amount exceeding Rs.10 lakhs

Aam aadmi / aurat totally depressed by tax proposals in the Budget 2016-17.

2. About the tax on PF, Pension / Superannuation and NPS

a) Employee Provident Fund: Till now the entire amount withdrawn from EPF on retirement is tax free. 

However, for contributions made from Apr 2016 onward, only 40% of the account balance, attributable to such contributions, shall be exempt from tax. In other words, 60% of the amount withdrawn would be taxed (only relating to the future contributions w.e.f. FY 2016-17).

b) Superannuation and Pension Plans: Similar to the above change in EPF, amount upon withdrawal / commutation would be tax exempt only up to 40% and the balance amount would now become taxable (only relating to the future contributions w.e.f. FY 2016-17).

c) National Pension System: Till now the entire amount withdrawn from NPS is taxable. As per new provisions, 40% of the amount withdrawn would now be tax exempt and tax would be levied only on the balance 60%.

That's not all:

Presently, 12% of your salary is deducted as contribution towards EPF. The employer too contributes 12%. Under Sec 80C, tax deduction on your PF contribution, is limited to Rs.1.50 lakhs. But, there is no such limit on the employer's portion and the entire amount is tax exempt. Henceforth, the employer's portion too shall be tax exempt up to Rs.1.50 lakhs only. 

Other Tax Proposals in the Budget 2016-17

One. Higher surcharge for those earning more than Rs.1 crore

Presently, those earning more than a crore in a year, are liable to pay 12% as surcharge on their income tax. This surcharge on income tax has now been increased to 15%, if the income exceeds Rs.1 crore.

Two. More tax rebate to those earning less than Rs.5 lakhs

As present, if your income does not exceed Rs.5 lakhs, income tax up to Rs.2000 is completely waived off u/s 87A. To provide relief to those in the lower income slab, this rebate on income tax is enhanced to Rs.5000.

Three. More tax deduction on the rent paid

If you don't get any House Rent Allowance (HRA) from your employer, but are staying in a rented accommodation, you can claim a maximum deduction of Rs.2000 from your taxable income. This is subject to a formula i.e. minimum of the following:
a) Rent paid minus 10% of the total taxable income
b) 25% of the total taxable income
c) Rs.2000 per month

As per Union Budget 2016-17, the maximum deduction you can now claim is enhanced to Rs.5000 per month.

Four. Third hike in Service Tax within one year

In June 2015, the Modi Govt. had hiked the Service Tax (payable on so many of the day-to-day services) from 12.36% to 14%.

In November 2015, a Swachh Bharat Cess of 0.5% was introduced, taking the total Service Tax liability to 14.5%.

And now, the Budget adds one more cess — Krishi Kalyan Cess — to take the Service Tax burden to 15%. This extra charge will apply from June 2016.

Thus, we will have to shell out more money for many of the everyday services availed by us. 

Five. No capital gains tax under Sovereign Gold Bond Scheme

As per the Gold Monetization Scheme, if you deposit your gold then the capital gains on the same is tax free.

However, if instead of buying physical gold, you invest in Sovereign Gold Bond Scheme, the capital gains is taxable.

In order to have parity between the two schemes, the capital gains by individuals under the Sovereign Gold Bond Scheme too shall be exempt from capital gains tax.

Six. Extension in time limit for tax benefit on interest on home loan

As you may be well aware, you get a deduction of up to Rs.2 lakhs for interest paid on your home loan.

This, however, is subject to the condition that the property is acquired or constructed within 3 years from the end of the financial year in which the loan was availed.

Given that delays in project completion is quite common, this eligibility period has been extended to 5 years. This will bring relief to many unfortunate buyers, stuck with incomplete properties. 

Seven. Additional tax benefit on home loan interest for first time home buyers

First time home buyers will get Rs.50,000 as additional deduction of interest on home loan, over and above the normal Rs.2 lakhs limit, provided
a) Property Value should be less than Rs.50 lakhs
b) Loan Amount should not exceed Rs.35 lakhs
c) Loan Sanctioned between Apr 2016 to Mar 2017.

This benefit of deduction shall continue till the loan is repaid.

Eight. Cars to become more expensive

Small motor vehicles, up to 1200cc, and running on petrol / LPG / CNG will attract 1% Infrastructure Cess. Vehicles up to 1500cc and running on diesel will be levied 2.5% Infrastructure Cess. All other higher engine capacity vehicles will be charged 4% Cess.

That's not all:

Motor vehicles costing above Rs.10 lakhs will attract a Tax Collection at Source of 1%.

By the way: Cash purchase of all goods and services (with a few exceptions) exceeding Rs 2 lakh, will also attract 1% Tax Collection at Source.

Nine. STT tripled on Options Trading

Those trading in Options (that are not exercised) will now pay higher Securities Transaction Tax. STT on options has been increased from 0.017% to 0.05%

Ten. Service Tax relief on single premium annuity plans

The service tax on single premium annuity policies has been reduced from 3.5% to 1.4%.

This, in brief, are the first reactions to the Union Budget 2016-17 presented yesterday. This, of course, is subject to the Finance Bill, 2016 being approved and passed in the Parliament. Also, on some of the matters discussed above, Govt. is likely to issue certain clarifications.

So, this is not the final say on the matter. Changes, if any, will be posted on this blog from time to time.

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