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Budget 2016: 8 Key Takeaways for Individual Taxpayers

The recent announcements made inbudget 2016indicate that while the budget certainly proves to be a relief to the poor and low income tax payers, no significant changes have been made for the middle-income salaried class. Of course, it’s another story altogether for the high-income group, who have been hit hard.

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Find out what budget 2016 holds for individual tax payers in the following table:

Income Tax Rate Impact: Budget 2016’s impact on Individual Tax Payers

Up to INR 2,50,000 Nil
INR 2,50,001 to INR 5,00,000 10% INR 3,000 (Savings)
INR 5,00,001 to INR 10,00,000 20%
INR 10,00,001 to INR 1 crore 30%
Above INR 1 crore 30% 3% higher surcharge

Though the tax slabs remain the same, there are a number of changes proposed in Budget 2016 which would impact individual tax payers. They are as under: 

  • Increase in HRA exemption – As per Budget 2016 Individual tax payers who do not receive HRA from employers now stand to benefit from this incentive as the deduction limit for rent paid by those who won’t own a house has been raised. Under section 80GG, they can claim tax deduction, the limit of which has been increased to INR 60,000 per annum from INR 24,000. As a result, employees will be able to claim an additional deduction of INR 36,000 per annum. This benefit is likely to impact people in   the income bracket of 0 to 5 lakhs per year, the most. This benefit is not valid in the case of those employees who do receive HRA as a part of their compensation. 

  • Increase in limit for Tax Rebate – The ceiling of tax rebates under 87A has been raised from INR 2,000 to INR 5,000 in the budget 2016for individual tax payers residing in India who earn a total income of up to INR 5 lakhs a year. Small taxpayers will benefit from this incentive as well, as they will enjoy a relief of INR 3,000 in tax liability. According to the Finance Minister, this is expected to positively impact over 2 crore taxpayers. 

  • Benefits to first-time home buyers– In the budget 2016 it was announced thatindividual tax payers who are first-time home buyers can enjoy an additional tax relief of INR 50,000 per annum if the loan amount is INR 35 lakhs. However, this is provided the cost of the home does not exceed INR 50 lakhs. Given the current property rates in the major metros, this would probably prove to be more beneficial to people investing in the suburbs or Tier – II and Tier – III cities where the cost for real estate falls within the proposed limit. 

  • Tax relief on interest paid for Home Loans –When it comes to individuals who have invested in a new home, they need no longer fret if the builder does not give them possession of the house within three years. The Budget 2016 has proposed deduction in the interest payable on the loan if the property under construction or bought, is completed within five years from the end of that financial year the loan was availed. Through this benefit, people could save tax up to around INR 60,000 per annum. 

  • Parity in tax treatment of pension plans –As far as pensions go, up until now, in the case of the National Pension Scheme, the entire amount withdrawn at the time of retirement was liable to taxation. This has now been modified. As per budget 2016, up to 40 percent of the corpus can be exempted from tax. However, the news is not good as far as superannuation funds and recognized provident funds (including EPF) go – the Finance Minister proposes to levy a tax on 60 percent of the corpus,which will be applicable on the corpus created from contributions made after the 1 of April, 2016. This has been introduced in the in order to bring about greater parity in the treatment of tax on different types of pension plans. 

  • Benefits to professionals and small businesses under Presumptive Taxation Scheme – Freelancers,lawyers, small business owners and professionals will greatly benefit from a new incentive proposedin Budget 2016, where they will be able to avail of the presumptive taxation scheme if they earn an income of up to INR 50 lakhs per annum, with profit presumed to be 50 percent of the gross receipts.Additionally, small and medium enterprises with a gross income of up to INR 2 crores can now also avail of the presumptive taxation scheme, which so far, has been provided only to businesses with gross receipts that don’t exceed INR 1 crore. 

  • Changes in Dividend Distribution Tax (DDT)– Investors who receivea dividend that exceeds INR 10 lakhs per annum will have to pay a tax at the rate of 10 percent of the gross amount of the dividend, going forward. Thus far, the dividend income was already taxed and has already been paid by companies. In addition to this, individuals, firms and HUFs will also have to bear the brunt of this. This rule will uniformly apply to all investors, irrespective of their income slabs. 

  • Price changes in certain goods and service tax – The budget 2016announced an infrastructure cess of 1 percent on CNG, LPG and small petrol cars, a 2.5 percent on diesel cars of a certain capacity and 4 percent on other vehicles with a higher engine capacity, including SUVs. Furthermore, cigarettes, air travel, branded garments will also increase in price, while the price of routers, solar lamps and footwear will decrease. 

The Government has also proposed a 0.5 percent increase of service taxwith effect from the 1st of June, 2016 under the newly proposed ‘KrishiKalyanCess’. This cess has been proposed for the purpose of directing the accrued funds towards the improvement of agriculture and the welfare of farmers. The service tax on all taxable goods will thus now increase from the current 14.5 percent to 15 percent.

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