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10 Key Income Tax Rule Changes that will be Effective from 1st April 2018

The changes introduced in the Union Budget 2018 were not anticipated by taxpayers and salaried individuals. The Finance Minister of India, Mr. Arun Jaitley, has kept the basic income-tax slabs and rates unchanged. However, senior citizens are likely to gain much from the latest tax proposals.

Well, if we talk about the best of both worlds, then as a taxpayer, it is important to be aware of this year’s tax proposals as it is going to impact our daily lives and earnings in the fiscal year 2018-2019. So, let’s take a look at the key tax rule changes that will be effective from 1st April 2018.

1. Health and Education Cess- 

The tax slabs and tax rates will continue to remain unchanged for individuals and Hindu Undivided Family (HUF) in AY 2018-2019. However, cess imposed on tax liability will be increased by 1% from the current 3% to stand at 4%. This cess will be known as “Health and Education Cess”. This means that on the net taxable income of Rs.5 lakh, the tax liability will increase by Rs.125. Similarly, if someone has a net taxable income of Rs.15 lakh, then the tax outgo will increase by Rs. 2,625.

2. Reintroduction of Standard Deduction-

Benefitting the salaried class, the Finance Minister has proposed a deduction of maximum Rs.40,000 from the salary. This deduction will take the place of existing deductions like transport allowance and medical reimbursement. Moreover, apart from salaried individuals, pensioners can also avail the benefits of this deduction. Besides this, the standard tax deductions can be claimed straightway and would not require any bills or proofs.

3. Medical Reimbursement and Transport Allowance to become Taxable-

As the government reintroduces standard deductions, the tax exemptions available on medical reimbursement and transport allowance have been removed. Currently, the government provides a tax benefit of Rs.19,200 on the total salary as transport allowance and Rs.15,000 p.a. as medical reimbursement. It is expected that from 1st April 2018, these allowances will become a part of an individual’s taxable salary.

4. Increase in Tax Exemptions on Interest Accumulated by Senior Citizens-

The benefit of a higher deduction limit can be availed by senior citizens on the interest earned on deposits made at the post office, banks and on other recurring deposits. Currently, an income tax exemption up to Rs.10,000 is applicable to all individuals under section 80TTA of Income Tax Act on the interest earned from savings accounts held with any co-operative society, bank or post office.

The budget has proposed to increase this limit up to Rs.50,000 on for senior citizens under the new Section 80TTB of Income Tax Act. However, tax exemptions under section 80TTA will not be henceforth allowed for senior citizens.

Moreover, the government has proposed an increase in the investment limit of Pradhan Mantri Vaya Vandana Yojna from Rs.7.5 lakh to Rs.15 lakh. The government has also extended the PMVVY scheme till March 2020.

5. Increase in Medical Expenditure Deduction Limit-

Under Budget 2018, the government has proposed to hike the limit of tax exemption for senior citizens under sections 80D and 80DDB of Income Tax Act. Under section 80D, the limit has been increased from Rs.30,000 to Rs.50,000 whereas, under section 80DDB, the limit on tax exemptions has been increased from Rs. 60,000 to Rs.1 lakh for senior citizens and Rs. 1 lakh from Rs.80,000 for super-senior citizens.

6. Increasing the Threshold Limit for the TDS for Senior Citizens-

Along with the increase in the limit of interest-derived income for senior citizens, changes have also been proposed in Tax Deducted at Source (TDS) law. As per the revised tax law, there will be no TDS deductions for senior citizens on the accumulated interest of up to Rs.50,000 annually.

7. Extending the Tax-Free Withdrawal Benefit from NPS-

Extension of tax-free withdrawal benefit from National Pension Scheme (NPS) has been proposed by the government to non-employee subscribers. Currently, an employee’s contribution towards the National Pension Scheme is eligible for a tax exemption on 40% of the total amount payable to him/her on the closing of the account or while opting out. This deduction was earlier applicable to employee subscribers only. But, under budget 2018, the tax-free withdrawal benefit has been extended to all NPS subscribers, including those who are self-employed.

8. Taxability of Long-Term Capital Gain on Equity Shares-

A new 10% tax will be levied on long-term capital gains from equity-oriented funds and equity shares if the capital gain exceeds Rs.1 lakh in a financial year. However, for taxpayers’ benefit, the gains till January 31st, 2018 will not be taxable. This is going to impact the investors who were reliant on dividends from equity-oriented funds as a source of regular income.

9. Income Tax Exemption on Single Premium Payment of Health Insurance Policy-

Health insurance plans specifically provide some discounts if you pay the premium upfront for a few years. Earlier, the tax deduction limit against health insurance premium was up to Rs.25,000. According to the changes proposed in budget 2018, single premium payment of health insurance plans with more than 1 year of policy term will be eligible for income tax exemption on a pro-rate basis. This exemption is offered for the tenure during which the coverage is provided and is subject to a specified limit. For example, if the insurance company is offering a discount of 10% on the health insurance premium of Rs.40,000 for two years, then as per the proposed changes, you can claim Rs.20,000 each in both the years.

10.Higher Tax Exemption Limit Under Section 80D of Income Tax Act for Senior Citizens-

Under Budget 2018, the government has proposed to increase the tax exemption limit for senior citizens against the premium of health insurance policies. The income tax exemption is set to increase from Rs.30,000 to Rs.50,000. For people below the age group of 60 years, the exemption under section 80D remains same (Rs.25,000). In case your parent is a senior citizen (above the age of 60 years), you can claim an additional deduction up to Rs.50,000, which sums up as a total exemption of Rs.75,000.

Conclusion

Every year the release of budget satisfies some sections of the society while leaves others dissatisfied. This year’s budget has focused on providing more benefits to the senior citizens of the country. On the other hand, the impact on the psyche of salaried employees is yet to be determined. However, how beneficial these changes will actually be can only be seen in the long run.