Income Tax planning for 2018-19: New tax rules every taxpayer should know

Updated: April 5, 2018 6:34 PM

As we step into the new fiscal year, it is imperative that we plan our finances. Let us review the key changes which may impact the cash flow and investment decisions for FY2018-19.

Tax planning for FY18-19, income tax planning, income tax return, income tax slab, income tax rates, income tax rules, income tax rules in India, tax managementStart of the year is a perfect time to plan investments with an oversight of the changes from a tax perspective, so that one does not lose the small benefits which are now available.

As we step into the new fiscal year, it is imperative that we plan our finances. Financial planning needs to be done considering the changes introduced in this year’s Union Budget. So let us review the key changes which may impact the cash flow and investment decisions for the tax year 2018-19, from an individual tax perspective.

Tax slabs in the new year have not changed vis-a-vis the last year. Lowest tax rate continues to stay at 5% and the maximum at 30%. The tax exemption income limits for different categories of individual taxpayers are as mentioned below:

Individuals below 60 years: Rs 250,000

Individuals over 60 years and under 80 years: Rs 300,000

Individuals over 80 years and above: Rs 500,000

Given the fact that the status quo in tax slabs has not delighted the individual taxpayer, the government continues to levy an additional cess on the income tax. To address the education and health needs of the poor and rural families, the erstwhile secondary and higher education cess of 3% has been replaced with a 4% ‘Health and Education Cess’. Consequently, the maximum marginal rate of tax has increased from 35.535% to 35.88%.

The salaried class may have something to celebrate as starting from the tax year 2018-19, the government has reintroduced the “standard deduction” of Rs 40,000. Standard Deduction was last abolished in the Finance Act 2005. It is a fixed amount of deduction by which gross salary can be reduced to calculate taxable income under the head “salary”. The deduction of Rs 40,000 replaces the exemption available towards transport allowance of Rs 1,600 per month and medical reimbursement of Rs 15,000 per annum, which will no longer be available from the tax year 2018-19.

Senior citizens have been looked at favorably by the Finance Minister as various benefits have been given to this class of taxpayers in the form of increased deduction limits. Deduction from interest income earned by senior citizens will henceforth be governed by a new section. As per the new provisions, senior citizens can avail a higher deduction of Rs 50,000 in respect of interest income earned by them from deposits held in banks, post offices and co-operative banks. At the same time, threshold limit for deduction of tax at source on interest income for senior citizens has been raised from Rs 10,000 to Rs 50,000.

Another benefit to cheer senior citizens has been given by way of an increase in the deduction limit for payment of health insurance premiums. Till last year, the deduction available was restricted to Rs 30,000; which has now been raised to Rs 50,000. This will boost investment in health insurance policies by senior citizens, to help them stay sufficiently covered in case of any unforeseen circumstances.

In addition to above, the limit of deduction with respect to expenditure incurred on medical treatment of specified diseases (e.g. malignant cancers, chronic renal failure, hematological disorders, etc.) in case of a senior citizen has been increased to Rs 1 lakh. Deduction available until last year was Rs 60,000 in case of senior citizens and Rs 80,000 in case of very senior citizens.

Barring the above beneficial changes for senior citizens, individuals will now have to pay tax at the rate of 10% on long-term capital gains in excess of Rs 1 lakh, arising from transfer of equity shares, equity-oriented mutual funds and unit of business trust where securities transaction tax has been paid. Further, no benefit of indexation will be available against such gain. A section providing the method to grandfather the long-term capital gains earned till January 31, 2018 has been inserted for the assets which are sold after March 31, 2018. As regards the intervening period i.e. February 01, 2018 and March 31, 2018 the tax exemption status continues.

In line with the changes brought in the capital gain tax regime, the deduction from long-term capital gain available under section 54EC of the IT Act in case of transfer of any long-term capital asset will now be restricted to transfer of land and building only. Further, exemption under this section will be available if the capital gain amount is invested in bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation Limited (REC) or any bond as notified by the Central Government, issued on or after 1 April 2018, and redeemable after five years.

National Pension Scheme (NPS) is another tax saving instrument under which employees are currently allowed tax-free withdrawal up to 40% of the total amount payable on closure of the account or on opting out of the scheme. In order to motivate the investment in this scheme and also to bring parity between salaried and self-employed investors, this exemption has now been extended to all the subscribers.

Start of the year is a perfect time to plan investments with an oversight of the changes from a tax perspective, so that one does not lose the small benefits which are now available. “While it may seem small, ripple effects of small things are extraordinary” – Matt Bevin.

(By Divya Baweja, Partner, Deloitte India; Divya Agarwal, Senior Manager, and Mitesh Agrawal, Manager with Deloitte Haskins and Sells LLP)

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