Budget 2014 – Proposed Changes to Income Tax Laws Applicable To Individuals

 Union Budget 2014 – Highlights of Proposed Changes to Income Tax Laws Applicable To Individuals

Important information about budget proposals on income tax:

• Budget proposals on income tax do not become the law immediately.

• Modifications, albeit minor, are often made to few of the proposals while actually passing the law.

• The proposals become a law when both the houses of the Parliament pass the bill and the President of India gives his assent thereto.

• Almost all of the proposed amendments to the tax law would be effective from the Financial Year 2014-15. The tax returns for FY 2014-15 would be filed after you receive your Form 16 for the year in April 2015.
  

HIGHLIGHTS:

i)      Increase in basic exemption limit from Rs. 2 lakh and Rs. 2.5 lakh:

This proposed change would result in tax saving of Rs. 5,150 for most individual tax payers.

There has been a wide expectation that the amount of basic exemption would be increased to Rs. 5 lakh. However, that was not feasible considering the revenue and fiscal deficit targets set by the government. Given this constraint, this proposed increase of 25% from Rs. 2 lakh to Rs. 2.5 lakh is a welcome move from the Honorable Finance Minister.

ii)  Increase in the ceiling for deduction of interest on loan taken for purchase of house (section 24(b)):

Taxpayers would get more from their housing loans. Ceiling of deduction on interest on housing loan is proposed to be increased from Rs. 1.5 lakh to Rs. 2 lakh in respect of self-occupied houses. For those who are paying high amount of interest, the additional tax savings would be up to Rs. 15,450.

This again is a welcome change considering that the previous limit of Rs. 150,000 was set many years ago. However, it would have been more appropriate to set a limit which would change every year based on annual change in some index relating to housing prices and in the interest rates.

iii)Increase in the ceiling for deduction for investment (sections 80C, 80CCC and 80CCE):

Now, you have more incentive to invest more for tax savings. Ceiling on deduction on investments is proposed to be increased to Rs. 1.5 lakhs from Rs. 1 lakh. Individuals can have tax savings of up to Rs. 15,450.

The common investments covered are EPF, PPF, Life insurance premium, housing loan repayment, children tuition fees, etc.

A welcome move considering that the limit was set many years ago. Those who are in 10% tax bracket are unlikely to take benefit of this enhanced limit. However, the taxpayers in 30% tax bracket, i.e. those having annual taxable income of over Rs. 10 lakhs would definitely consider making additional investment for extra tax savings.

iv)                Changes in rules regarding tax exemption reinvestment of on long term capital gains on sale of a house (sections 54 and 54F):

The tax law provides for deduction from long term capital gains arising on sale of a house if the amount of gain is invested in a residential house. There was a lack of clarity about the quantum of tax deduction if taxpayer reinvested the amount of the long term capital gains in more than one house. The proposal seeks to clarify that the investment made only in one house would qualify for the tax deduction. Further, it is also clarified that the house to be acquired should be within India only.

A similar change is proposed in section 54F as well.

These proposed changes would overrule many judicial pronouncements wherein the taxpayers were allowed tax benefit on purchase of multiple houses and in some cases purchase of houses outside of India.

Taxpayers would be disappointed with this proposal which is restrictive. However, a good part is that the law is now sought to be clearly worded and would avoid unnecessary litigation.

v)                  Changes in rules regarding tax exemption reinvestment of on long term capital gains on sale of any asset in capital gains tax saving bonds (section 54EC):

The tax law provides a deduction from long term capital gains if the amount of gains is invested in certain bonds within 6 months from the date sale of the long term capital asset. It further provides that the investment in such bonds in a financial year cannot exceed Rs. 50 lakhs.

There was a lack of clarity on the amount of tax deduction on reinvestment in capital gains tax saving bonds when the capital asset was sold in the second half of the year. A lot of taxpayers claimed a deduction of Rs. 1 crore by splitting the investment in two financial years. It is now clarified that such splitting is not permissible and therefore, the total deduction in a financial year cannot exceed Rs. 50 lakhs.

While the proposed amendment provides more clarity, the taxpayers would be disappointed over the fact that the maximum amount of deduction now stands reduced from Rss 1 crore to just Rs. 50 lakhs.

vi)                Changes to taxation of income arising from non-equity oriented mutual funds:

So far, the units of non-equity oriented MFs were considered as long term capital assets if those were held for more than 12 months. It is proposed to change this period to 36 months. (Section 2(42A))

Currently, the taxpayers have an option to pay income tax on the long term capital gains on sale of such units at the rate of 10% without availing indexation benefit. It is proposed to remove this option. This would mean that the taxpayers would have to pay income tax at the rate of 20% after taking into consideration indexation benefit. (Section 112)

The Honorable Finance Minister, however, has been kind enough to retain the indexation benefit available on the units of non-equity mutual funds held for more than 3 years.

These above changes would mean that the investments alternatives to FDs such as FMPs would no longer be attractive unless the investments are made for more than 3 years.

vii)              Taxation of REITs (Real Estate Investment Trusts) (section 10(38) and section 111A):

REITs are structurally similar to mutual funds and invest only in real estate assets. It is proposed that the tax treatment of investments in the units of listed REITs would be made at par with those of listed equity shares. Therefore, the long term capital gains on sale of units of listed REITs would be made tax exempt and the short term gains would be taxed only @ 15%.

This proposal would make investment in REITs very attractive from tax perspective.

viii)            Other changes:

The rate of dividend distribution tax (DDT) payable by companies and non-equity oriented mutual funds is proposed to be increased slightly by a grossing up formula. (Sections 115O and 115R)

It is proposed to tax forfeiture of advance amount received on failed asset sale transactions as ‘income from other sources.’ (Sections 2(24) and 56). Earlier such forfeited amount was reduced from the cost of the asset being sold. In cases where the forfeited amount was more than the cost of the asset, the excess was considered as a capital receipt and as non-taxable. It was believed that this rule was misused and therefore this proposed amendment seeks to plug this loophole.

(Article is submitted by H&R Block (India) Private Limited a Company engaged in tax filing)