04/03/2016 8:17 AM IST | Updated 15/07/2016 8:26 AM IST

Budget 2016: Individual Tax Measures Are Driven By Social Security Agenda

Tax Time
Nick M Do via Getty Images
Tax Time

The Finance Minister (FM) in his Budget 2016 speech mentioned that in the current global headwinds, India has held its ground firmly and has shown extraordinary growth. The objective of the government for the next year is to 'Transform India'. To this end, the budget proposals have been built on nine distinct pillars. Tax reforms are the ninth pillar.

1. Marginal relief for small taxpayers

For small taxpayers having taxable income within ₹500,000, relief has been provided by increasing rebate from ₹2000 to ₹5000. For individuals who do not receive house rent allowance, the limit of existing deduction for rental payment has been increased from ₹24,000 per annum to ₹60,000 per annum, subject to other existing conditions.

2. Tax burden for the super-rich

While there have been tax-saving proposals for the small taxpayer, the super-rich are to face the brunt of increase in tax outflow. The surcharge rate has been increased from 12% to 15%, where taxable income exceeds ₹10 million. Dividends received by resident individuals will be taxed at the rate of 10% in case total dividend received from a domestic company exceeds ₹1 million per annum.

While there have been tax-saving proposals for the small taxpayer, the super-rich are to face the brunt of increase in tax outflow.

3. Impetus for affordable housing

The FM has proposed some relief for existing and new home buyers. To avail interest deduction of ₹200,000 per annum on a housing loan taken for self-occupied property, the construction or acquisition of such property needs to be completed within a period of three years, else the deduction is dis-allowed. Considering that completion of housing projects may be delayed, this period for completion of construction for availing the interest deduction has been extended to 5 years. Further, for 'first home buyers', deduction has been proposed of ₹50,000 per annum for loans up to ₹3.5 million sanctioned between April 2016 to March 2017, provided the value of the house does not exceed ₹5 million. Also, it is proposed to exempt service tax on construction of affordable houses up to 60sq m of carpet area (approx. 645 sq ft) under any schemes of the central or state government, including Public Private Partnership schemes. This is intended to encourage affordable housing projects.

4. Sweeping amendments to taxation of retirement schemes

The FM has proposed rationalizing various savings/retirement schemes with the objective of moving to schemes which will provide regular pension income post-retirement to individuals employed in the private sector.

Currently, contributions made to PF by the employer (up to 12% of the salary) and employee, and interest earned from that point on, were completely exempt from tax. No tax was levied at time of contribution, accrual of interest and subsequent withdrawal of the corpus upon completing five years of continuous service and other prescribed conditions.

Now, the FM has proposed that the employer's contribution in excess of ₹150,000 will be subject to tax. There will be no tax at time of annual accretion of the corpus. However, at the time of withdrawal, 60% of the corpus attributable to contributions made by the employee from 1 April 2016 onwards will be subject to tax. Subsequently, the government has clarified that if the employee invests this 60% of the corpus in purchasing annuity which will provide regular pension income, it will not be taxed. However, the regular pension coming from the annuity purchased will be subject to tax. Though the budget proposals do not mention purchase of annuity from the PF corpus, it is expected that this will be rolled out separately.

The FM is gently nudging the salaried class to move to NPS. This will bring in additional liquidity and investment in the capital markets...

The FM has proposed a similar amendment for superannuation funds and National Pension Scheme (NPS) with the intended objective of bringing parity between the three schemes. The exemption limit for the employer's contribution to the superannuation fund has been increased from ₹100,000 per annum to ₹150,000. For NPS, 40% of the total amount payable to the individual at the time of closure or opting out will be exempt from tax. However, the employer's contribution to NPS is exempt from tax up to 10% of salary without any monetary capping. Further, the proposals also provide for the transfer of corpus from PF and superannuation to NPS without any tax consequence. Therefore, the FM is gently nudging the salaried class to move to NPS. This will bring in additional liquidity and investment in the capital markets, considering that a major portion of the NPS fund is invested in equities (with a cap of 50%).

While there has been strong pushback after these proposals were tabled, the revenue secretary has clarified that only the interest earned on PF contributions will be taxed on withdrawal and not the principal amount. It is expected that the government will provide clarifications and possibly amend the proposals to provide relief by not taxing the principal amount of the contributions made.

Overall, the above measures reflect the government's desire to provide socio-economic security to everyone. Of course, the budget proposals will have to face the test of time before we can say that the desired parity in socio-economic conditions has been achieved.

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