The direct tax proposals contained in the Finance Bill 2008 pertaining to individuals are considered to be the best in the budgetary history of India. At no point in time has the burden of tax on individuals been reduced to the extent it has been done on 29th February, 2008.
The provisions of the Finance Bill, 2008 relating to direct taxes seek to amend the Income-tax Act, inter alia, with a view to :-
(1) Restructuring the personal income tax slabs by lowering the burden on the individual taxpayers significantly so as to enhance productivity and revenue contribution through improved compliance;
(2) Streamline tax administration so as to reduce transaction costs and facilitate voluntary compliance;
(3) Provide impetus for growth in trade, commerce and industry;
(4) Enhance research and development capacity in the economy through calibrated tax incentives;
(5) Provide appropriate incentives to enable self-financing of old age security through the mechanism of reverse mortgage of residential house and health insurance; and
(6) Encouraging the growth of the corporate debt market by eliminating TDS on interest on corporate bonds so as to facilitate seamless transactions.
The reduction in the tax burden is best illustrated in the following table:
Section 80-C of the Income-tax Act provides for a deduction of up to rupees one lakh to an individual or a Hindu undivided family (HUF) for, –
(i) Making investments in certain saving instruments; or
(ii) Incurring expenditure on tuition fee and repayment of housing loan.
With a view to encourage small savings, it is proposed to enlarge the scope of eligible saving instruments by inserting two new clauses in section 80-C (2). The following investments made by the assessee will be eligible for deduction under section 80-C within the overall ceiling of rupees one lakh:-
(i) Five year time deposit in an account under Post Office Time Deposit Rules, 1981; and
(ii) Deposit in an account under the Senior Citizens Scheme Rules, 2004.
Section 80-D provides for a deduction of up to fifteen thousand rupees to an assessee, being an individual or a Hindu undivided family. The deduction is allowed for making a payment to effect or keep in force an insurance on, –
(a) The health of the assessee or on the health of the wife or husband, dependent parents or dependent children of the assessee where the assessee is an individual;
(b) The health of any member of the family where the assessee is a Hindu-undivided family.
Since health insurance cover for the elderly comes at a relatively higher price, it is necessary to encourage individual assessees to supplement the efforts of their parents in getting medically insured. Accordingly, it is proposed to allow an additional deduction of up to fifteen thousand rupees to an assessee, being an individual, on any payment made to effect or keep in force insurance on the health of his parent or parents.
Further, it is proposed that if either of the individual assessee’s parents, who has been medically insured, is a senior citizen, the deduction would be allowed up to twenty thousand rupees. For example, an individual assessee pays (through any mode other than cash) during the previous year medical insurance premia as under:
(i) Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and dependent children;
(ii) Rs. 17,000 to keep in force an insurance policy on the health of his parents.
Under the proposed new provisions, he will be allowed a deduction of Rs. 27,000 (Rs. 12,000 + Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (Rs. 12,000 + Rs. 17,000). Whether the parents are dependent or not, is not a consideration for deciding the deduction under the proposed new section.
Further, in the above example, if cost of insurance on the health of the parents is Rs. 30,000 out of which Rs. 17,000 is paid by any non-cash mode) by the son and Rs. 13,000 by the father (who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs. 17,000 (in addition to the deduction of Rs. 12,000 for the medical insurance on self and family) and the father will get a deduction of Rs. 13,000.
The Finance Minister, in paragraph 89 of his speech, while presenting the Union Budget, 2007-08, had announced that the National Housing Bank (NHB) will introduce a reverse mortgage scheme for senior citizens. In pursuance of this announcement, some of the banks have already formulated scheme for reverse mortgage.
In the context of the aforesaid scheme, it is necessary to resolve the tax issues arising therefrom. The first issue is whether mortgage of property for obtaining a loan under the reverse mortgage scheme is transfer within the meaning of the Income-tax Act thereby giving rise to capital gains. Section 2(47) provides an inclusive definition of ‘transfer’. Further, ‘transfer’ within the meaning of the Transfer of Properties Act includes some types of mortgage. Therefore, a mortgage of property, in certain cases, is a transfer within the meaning of section 2(47).
It is therefore proposed to insert a new clause (xa) in section 47 to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government will not be regarded as a transfer and will not attract capital gains tax.
The second issue is whether the loan, either in lump sum or in instalment, received under a reverse mortgage scheme amounts to income. Receipt of such loan is in the nature of a capital receipt. However with a view to providing certainty in the tax regime to the senior citizen, it is proposed to amend section 10 of the Income-tax Act to provide that such loan amounts will be exempt from income-tax.
Consequent to these amendments, a borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
Section 115-WC provides for valuation of the fringe benefits provided by the employer. Any expenditure on or payment through pre-paid electronic meal cards will now be excluded from the hospitality expenditure for calculation of the value of fringe benefit. Such electronic meal card should not be transferrable, should be usable only at eating joints or outlets and should fulfill such other conditions, as may be prescribed.
The Explanation to clause (E) is proposed to be amended to provide that any expenditure incurred or payment made to-
* Provide cr?che facility for the children of the employee; or
* Sponsor a sportsman, being an employee; or
* Organize sports events for employees, shall not be considered as expenditure for employees’ welfare for the purpose of calculation of the value of fringe benefits.
Clause (K) is proposed to be omitted. Hence, any expenditure on or payment made for maintenance of any accommodation in the nature of guest house will not be included for valuation of fringe benefits.
Further, clauses (c) and (d) of section 115-WC(1) are proposed to be amended so as to provide that the value of fringe benefits on account of expenditure on festival celebration shall be twenty per cent as against the existing rate of fifty per cent. These amendments shall take effect from 1st April, 2009 and shall accordingly apply in relation to assessment year 2009-10 and subsequent years.
To conclude, the budget proposals pertaining to individuals can undoubtedly be categorized as Triple A; the three As signifying Aam Admi Aurat.
The author is advocate, Supreme Court