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Finance minister P Chidambaram
has made a sincere effort to simplify the personal income tax structure currently
applicable by revising the existing income tax slabs. These proposals are expected to
change the very nature of personal income taxation and boost revenue by around 30%. After
all, Chidambaram has pegged a figure of Rs 66239 crore to be garnered from income tax
collection in FY 2006, up from Rs 50929 crore as per the revised estimate for FY 2005.
Union Budget 2005-06 has raised the income-tax exemption limit of
individuals to Rs one lakh, revised the existing income tax slabs, done away with standard
deduction and rationalised tax saving schemes.
The threshold limit for tax exemption has been proposed at Rs one lakh,
up from the current Rs 50000. This means that individuals earning up to Rs one lakh will
not have to pay any tax on their income. The threshold exemption limit for women has been
raised to Rs 1.25 lakh, from the earlier Rs 75000, while for senior citizens it is now Rs
1.5 lakh.
Earlier, individuals earning between Rs 50000 and Rs 60000 paid 10%
income tax, while those earning between Rs 60000 and Rs 1.5 lakh paid 20% tax. Income
above Rs 1.5 lakh attracted 30% tax. Besides, 10% surcharge was levied on income above Rs
8.5 lakh.
The budget has proposed three income tax brackets between 10% and 30%.
Individuals earning between Rs one lakh and Rs 1.5 lakh will attract a 10% tax,
income between Rs 1.5 lakh and Rs 2.5 lakh 20% tax and income above Rs 2.5 lakh 30% tax.
The income limit on which a 10% surcharge is applicable has been raised to Rs 10 lakh from
Rs 8.5 lakh.
Along with a higher minimum exemption limit, the budget has proposed to
abolish some important sections earlier utilised to save taxes: sec 88, sec 80CCC, sec
80CCD and sec 80L of the Income Tax Act, 1961.
Earlier, individuals earning an annual income of less than Rs 5 lakh
were eligible to claim a tax rebate under sec 88. This included investment in specified
financial assets like premium towards life insurance policies, equity-linked tax saving
schemes, public provident fund, contribution to employee provident fund, national saving
certificate, payment of tuition fees and repayment of principal amount on housing loans.
Investment in the any of these with an upper limit of Rs 70000 was eligible for a tax
rebate. An additional sum of Rs 30000 could be invested in infrastructure bonds under
the same section.
Within the overall investment ceiling of Rs one lakh, there were
sub-limits for each instrument. For instance, an individual could claim a yearly tax
rebate of up to Rs 20000 a year for repayment of housing loan principal and Rs 24000
for payment of tuition fees. Individuals with a gross total income less than Rs 1.5 lakh
could claim a 20% tax rebate under sec 88, while those with a gross total income between
Rs 1.5 lakh to Rs 5 lakh earned a 15% rebate. Those earning more than Rs 5 lakh were not
eligible for sec 88 tax break.
Sec 80L, to do with interest income, too, has been withdrawn. Under
this section, the maximum deduction permissible was Rs 15000 a year, including Rs 12000
interest earned from banks. With the removal of sec 80L benefit, interest income from bank
fixed deposit, post-office saving scheme, national saving certificate, life insurance,
public provident fund and corporate fixed deposit will attract tax.
Sec 80CCC allowed for deduction of premiums paid under a pension plan
with a maximum limit of Rs 10000 per year from the total income, while section 80CCD
allowed for deduction for contribution to the pension scheme notified by the Central
government. Both these sections have been withdrawn.
Although the benefits available to individual taxpayers under sec 88,
sec 80L, sec 80CCC and sec 80CCD of the IT Act have been scrapped, the deductions have now
been brought under a new ceiling of sec 80C with an upper limit of Rs one lakh. In short,
the proposed introduction of income-based deduction for savings under sec 80C replaces the
earlier rebate method. This means that the traditional tax-saving instruments valid
earlier under the two sections still qualify for the proposed sec 80C deduction. The tax
breaks will be clubbed under the overall limit of Rs one lakh under sec 80C. This
consolidated limit of Rs one lakh will qualify as deduction directly from the gross total
income before tax is calculated, irrespective of the individual’s taxable income.
The consolidated investment limit of Rs one lakh will allow taxpayers
greater flexibility in making judicious saving/investment decisions depending on their
risk appetite and risk-return profile. The proposal seems to be more realistic as it
recognises that every taxpayer is different with different financial needs. Earlier, every
taxpayer had to invest in different asset classes in same ratio. In the new regime, an
assessee can invest in whatever instrument that best suits him. Thus, taxpayers are free
to choose their instrument of savings with
no sub-limit for any one instrument.
Now, if one combines the minimum exemption limit of Rs one lakh and the
consolidated saving of Rs one lakh under section 80C, the total exemption for an
individual shoots up to Rs 2 lakh. Thus, an individual earning a salary of Rs 6 lakh, can
make a consolidated investment of Rs one lakh and get it deducted from his salary,
reducing his taxable salary to Rs five lakh. Of Rs 5 lakh, the first Rs one lakh gets a
tax exemption. On the balance Rs 4 lakh, he pays 10% tax for his salary between Rs 1 lakh
to Rs 1.5 lakh. Between Rs 1.5 lakh and Rs 2.5 lakh, he pays 20% tax, and on the remaining
Rs 1.5 lakh (Rs 4 lakh – Rs 2.5 lakh), he pays 30% tax.
Let us study this with examples. A taxable income of Rs 1.5 lakh was
earlier eligible for a standard deduction of Rs 30000, reducing the net salary to
Rs 1.2 lakh. Deduction of Rs 15000 available on interest under sec 80L and
Rs 10000 under sec 80CCC, reduced his net taxable salary to Rs 95000. In the new
regime, from the taxable income of Rs 1.5 lakh, the deduction of the proposed Rs one
lakh under consolidated saving, reduces the taxable salary to Rs 50000, which
attracts no tax.
Standard deduction of Rs 30000 and deduction under sec 80L and 80CCC
reduce the net taxable salary of an individual earning Rs 5 lakh to Rs 445000. Deducting
Rs 107500 tax and sec 88 benefit (Rs 15000), the net tax earlier was Rs 92500. Adding
2% education cess, the net tax payable stood at Rs 94350. Now, under the new tax regime,
Rs one lakh deduction under sec 80C will bring the taxable salary down to Rs 4 lakh. A tax
of Rs 70000 and Rs 1400 education cess amount to a net tax payable of Rs 71400, resulting
in net tax savings of Rs 22950 (94350-71400).
Let us see how an individual in the higher income group of Rs 9 lakh
fares in the new regime. Earlier, with a Rs 20000 standard deduction and Rs 25000
benefit under sec 80L and 80CCC, the taxable salary stood at Rs 855000. With no benefit
available under sec 88, the tax amounted to Rs 230500. Adding 10% surcharge (Rs 23050) and
2% education cess (Rs 5071), the net tax payable by the individual stood at Rs 258621.
As the new regime has no standard deduction, but allows a consolidated
investment of Rs one lakh under sec 80C, the net taxable salary is Rs 8 lakh. Tax on this
amounts to Rs 190000. There is no surcharge at this level. The 2% education cess increases
the net tax payable to Rs 193800, leading to a tax saving of Rs 64821.
Therefore, the greatest beneficiary of the revision in tax slab is the
individual in the income tax bracket of Rs 8.5 lakh and Rs 10 lakh, as beyond that the
assessee continues to pay the 10% surcharge.
In addition, six categories of deductions, namely interest paid on
housing loans (sec 24), medical insurance premia (sec 80D), specified expenditure on
disabled dependent (sec 80DD), expenses for medical treatment (sec 80DDB), interest on
loans for higher studies (sec 80E) and deduction to a person with disability (sec 80U)
will continue to receive the same tax treatment.
An investment of Rs 10000 on medical insurance premia enjoyed full tax
deduction. The deduction increased to Rs 15000 for senior citizens. This benefit continues
in 2005-06 also.
Housing loan borrowers, too, benefit. Currently, a maximum of Rs 1.5
lakh annual interest payment on housing loan for self-occupied property enjoys full tax
deduction under sec 24 of the IT Act. This will continue.
Earlier, the principal component of the housing loan was clubbed under
sec 88, with a maximum limit of Rs 20000, to claim 20% rebate. As the housing loan aged,
the principal component increased. But the excess principal paid was not eligible for
rebate. In the new tax regime, principal component up to Rs one lakh can be claimed under
sec 80C. Add this to the Rs 1.5-lakh yearly interest component, which is tax-free under
sec 24 of the IT Act. A housing loan borrower can now deduct a cool Rs 2.5 lakh annually
from his net taxable income.
Mutual fund investors also stand to gain from the budget proposals.
Earlier, investors could claim a maximum tax rebate of Rs 10000 a year by investing in
equity-linked saving schemes. The removal of sec 88 and the introduction of sec 80C
ensures that individuals can invest up to Rs one lakh to claim tax exemption. This is a
positive step as ELSS is the only equity-based investment product available in the sec 88
basket and will help mutual fund investors take advantage of the bull run in equities.
Another benefit is that as such schemes carry a three-year lock-in period, which allows
the opportunity of long-term savings.
As a matter of fact, mutual funds gain on other fronts, too. With the removal of sec
80L, under which interest income from specified instruments was exempt up to Rs 15000 and
the proposal to tax in future withdrawals from tax saving instruments under
exempt-exempt-taxed (EET) norm, mutual funds score over investment in instruments like NSC
and RBI Taxable Bonds as dividend income from mutual funds continues to be tax-free and
redemption after one year will attract no capital gains tax. |
