Budget 2018: As Finance Minister Arun Jaitley presents the Union Budget on Thursday, individuals—both salaried and self-employed —will keenly watch if he raises the exemption limits from Rs 2.5 lakh, changes the tax slab rates, increases the investment limit under Section 80C, increases the present limit on allowances and introduces new tax-saving schemes.
Budget 2018: As Finance Minister Arun Jaitley presents the Union Budget on Thursday, individuals—both salaried and self-employed —will keenly watch if he raises the exemption limits from Rs 2.5 lakh, changes the tax slab rates, increases the investment limit under Section 80C, increases the present limit on allowances and introduces new tax-saving schemes. Or will he levy long-term capital gains tax on stocks, which may halt the equity bull run?
Deductions under Section 80C
The tax exemption limit of Rs 2.5 lakh was last changed in 2015 and even the tax deduction under Section 80C of the Income Tax Act was raised from Rs 1 lakh to Rs 1.5 lakh. The slab rate was tinkered marginally last year to give some relief to small tax payers. The highest slab rate of 30% plus cess and surcharge kicks in for those earning above Rs 10 lakh. Rakesh Nangia, managing partner, Nangia & Co LLP, says the woes of the salaried class needs to be redressed by reintroducing standard deduction where a flat rate of 20% can be fixed, subject to a maximum limit, in order to remove the disparity between salaried and business class.
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Section 80C has a maximum limit of Rs 1.5 lakh and most of the investments such as Public Provident Fund, National Savings Certificates, employee’s contribution to provident fund, tax-saving mutual funds, five-year fixed deposits in banks or post office and premiums paid for life insurance products come under this section. It also covers market-linked investment options, such as equity-linked savings scheme of mutual funds and unit-linked insurance plans and even principal repayment of home loan. Experts, however, say, investors should not just look at tax-saving financial products to build their long-term portfolio.
Tax on capital gains
This year there has been a lot of talk that the government may impose long-term capital gains tax on equity to bolster its revenues from the equity markets. At present, any gains from holding stocks over a year is tax-free. Short-term capital gains, or stocks or units of mutual funds sold before one year are taxed at 15.45%. It is estimated that the government is losing nearly Rs 50,000 crore every year due to exemption of long-term capital gains tax.
Analysts say the government may either remove the distinction between tax on long-and short-term capital gains or increase the holding period for STCG to three years from one year or tax at the same rate like all debt products. They also say the the country is seeing more household savings going into financial assets as mutual fund folios and net inflows in mutual funds are touching new heights every month. Any long-term capital gains tax may hamper household savings flow in equity. They also say that if the government really wants to bring in long-term capital gains tax, then it should announce a clear timeframe for such a tax so that there is no sudden shocks to the financial markets.
National Pension System (NPS)
NPS was introduced in 2004 for government employees and, in 2009, it was extended to all private sector employees. A pure defined contribution pension product it is an ideal investment tool for retirement planning. In the 2015 Budget (from FY 2015-16), finance minister Arun Jaitley introduced an additional income tax deduction of Rs 50,000 for contribution to NPS under Section 80CCD(1B).
In 2016, the finance minister had made withdrawals from NPS on maturity tax-free for up to 40% of the total corpus accumulated. So, effectively an individual has to pay tax on 20% of the maturity corpus. Other savings schemes such as PPF and EPF, however, enjoy tax benefits in all the three stages: contribution, interest earned and withdrawal.
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NPS offers multiple asset allocation options to choose from and the returns can even go in double digits in the long-term. NPS can be used as the main vehicle for wealth creation and retirement planning, especially for those under 40 years of age who still have 20 years for retirement. Rajiv Bajaj, chairman and managing director, Bajaj Capital says, if the government were to look to merge the functions of EPF and NPS and enable every working class and self-employed Indian to choose their retirement cum pension plan, as per their needs, the flexibility allowed in NPS structure would revolutionise the way Indian households plan for their financial future. “NPS should become exempt-exempt-exempt like EPF and be made mandatory for private sector employees,” he says.
So, will the finance minister cheer all and really make 2018 a dream budget for individual taxpayers?