Impact of Budget (Income Tax Amendments) on your investments/personal finance strategy:

There were few changes (amendments) of Income tax in the current budget. Major highlighted were

  • Change in Tax Slab (from Rs. 2Lakhs to Rs. 2.5Lakhs for Individuals)
  • Increase of limit U/s. 80C (savings) – from Rs. 1Lakh to Rs. 1.5Lakh
  • Increase in deduction of Interest on Housing loan–from Rs. 1.5Lakh to Rs. 2Lakh

However, there were other few changes which will definitely impact you in terms of tax liability, savings strategy etc., We will discuss these now to get more clarity and to start first I will cover the above 3 points and their impact (in brief –as already covered by many).

I. Change of Income Tax Slab:

– Income tax slab was increased from Rs. 2Lakh to Rs. 2.5Lakhs for individuals.

– For Senior Citizens increased from Rs. 2.5Lakhs to Rs. 3Lakhs

– This will save Rs. 5,150 (including cess) and for High Tax bracket individuals savings would be Rs. 5,665

II. Increase of limit U/s. 80C

Now you can save extra Rs. 50,000 and get tax relief. This will save you another Rs. 5,150 to Rs. 16,995 depending on your tax bracket

Now you have to increase your savings/other instruments to get this benefit.

III. Increase in Interest on Housing Loan limit

Interest on housing loan increased from Rs. 1.5 Lakhs to Rs. 2 Lakhs – resulting a saving of Rs. 5150-Rs. 16995 –depending on your tax bracket

Other Changes:

IV. Capital Gains Tax changes

Changes in brief: Budget changed taxation related to non-equity mutual funds like FMPs, Debt Funds, Liquid Funds

– Need to hold 3 years to become long-term (instead of 1year)

– Taxed @ 20% (Earlier minimum of 10% without indexation & 20% with indexation)

Impact: Now, return from these FMP/Funds will be included in your income if holding period is below 3years. Also it will have retrospective effect on your fixed instrument holdings. For example if you have purchased 1year-FMP in Mar-2014 of Rs. 10,000. The return would be included in your income & taxed based on the present slab. Means it may be taxed at 30%(plus SC+Cess)!!!…if you are in 30% slab.

With these changes – you need to rethink of investing in Liquid/Debt Funds & FMP of 1 year vis-à-vis Bank Fixed Deposits.

PS: News agencies reported to change the proposal to be prospective instead of retrospective to give relief to individuals.

V. PPF limit increased

Earlier you can save Rs. 1Lakh/pa in PPF. Now it is allowed to save uptoRs. 1.5Lakhs and get the benefit. Don’t forget to save extra amount of Rs. 50K if you have PPF in your wife name etc.,

VI. Long Term Gains- Reinvestment in House Property

Budget proposed to change Section 54& 54F – allowing exemption of long-term capital gains for only one house. Earlier if you have long-term capital gains can be re-invested in house property and claim exemption for any number of houses as long as long term gain is accrued on sale of residential property. Now, exemption is allowed for only 1 house.

VII. Long Term Gains – Exemption on investing in Bonds

Budget proposed to restrict the “Overall” exemption to Rs. 50Lakhs for investment in bonds.

Earlier, considering the 6 months time period- many claimed/allowed to claim exemption of Rs. 50Lakhs in one financial year and another Rs. 50Lakhs in the next financial year.

From current year onwards you can avail a maximum benefit of Rs. 50Lakhs by investing in bonds on your long term capital gain.

VIII. Forfeited Advance

Forfeited advance is now taxable under Other Income instead of adjusting in capital gains.

IX. Dividend Distribution Tax (DDT)

Dividend distribution tax has been proposed for Grossing-up –effectively companies have to pay around 3% extra as tax. Effectively companies may rethink on the dividend percentage.

X. Real Estate Investment Trusts (REIT):

Taxation of REIT has been clarified and bought many amendments. Also proposed that long-term capital gain on sale of REIT units exempted, Short-term capital gains taxed @ 15% – making more attractive to invest in REIT. With these proposals, hope more REITs will come for investment.

(Author – ‘Addepalli Bindu Madhav’ may be contacted on E-mail: bindumadhavca@gmail.com)

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Tags : Budget (1957) Budget 2014 (172) Income Tax Deductions (435)

0 responses to “10 Income Tax changes affecting your investments/personal finance strategy”

  1. Vikas p says:

    Hello
    Please advise if there has been a change in the savings limit u/s 80D for the FY 2014-15.
    Thank you in advance

  2. Paul Chandra Kumar says:

    Excellent gist – Congrats!.
    I would like to make a point which you have also clearly explained which needs to be seriously taken up by individual tax payers. Individuals plan tax based on existing provisions and invest with great difficulty. Such be the case, any new amendment should only be prospective (ie) it should be relevant and applicable only for such investments made on or after the finance bill is passed. A small e.g, individuals who had invested all their savings in a 368 day FMP on 1st March 2014 thinking that they can get indexation benefit/Long term CG @10% are made fools and now they have to pay @ 30% (if highest slab). Absolute atrocity . What if they cooly say (after huge money pumped into PF a/cs) that interest is taxable on redemption of PF hereafter. If a person taking housing loan to get interest exemption with a long term view in mind suddenly denied this exemption in one fine budget and he cannot also repay the loan thereafter (except by selling that flat !). Hence all amendments should be only for investments made from a prospective date. As individuals we should all join together and represent.

  3. Leelendra says:

    Hi Madhav,
    Great Summary!
    Regards,
    Leelendra

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