The finance minister has built the road map for a new direct tax code and announced significant proposals from a personal tax perspective in his budget speech. Though the budget provisions will become law only on receiving the mandatory approvals, tax planning can begin by being aware of the different incentives and proposals that have been laid down and by understanding the direct impact these proposals have on ones savings and investment.
Exemption Limit Raised Thankfully, the personal income-tax exemption limit has been raised for senior citizens from the existing limit of Rs 2.25 lakh to Rs 2.40 lakh, promising them a gain of Rs 1,545. The marginal increase in the income tax exemption limit by Rs 10,000 i.e. from Rs 1.80 lakh to Rs. 1.90 lakh for women tax payers and from Rs 1.50 lakh to Rs 1.60 lakh for all other categories of individual tax payers has resulted in savings of Rs 1,030.
Removal of Tax Surcharge The biggest relief is the removal of income tax surcharge of 10 percent applicable to the individuals with income of more than Rs 10 lakh, which shall generate additional spendable income for this high income group. Let us take the example of Mr Joy who has net taxable income of Rs 20 lakh. Considering the new slab rates, he would pay a tax of Rs 5,04,000 (excluding 3 percent education cess). Now with the removal of 10 percent surcharge, Mr Joys joy is worth the saving of Rs 50,400.
Abolition of Fringe Benefit Tax The proposed abolition of Fringe Benefit Tax (FBT), seen as one of the key proposals in the Budget 2009, can take away most part of the joy from employees since they will now be liable to pay income tax on a lot of benefits on which FBT was paid by the employer. Under the FBT regime, the employer paid FBT on benefits such as contribution to approved superannuation fund, motor car provided by the employer, gift vouchers, meals, travel, club memberships and so on. Not only the employer was paying FBT, such expenses were subject to FBT at much lower rates because of specific valuation percentages, which resulted in a lesser effective rate of FBT. However, with the removal of FBT and assuming that the old valuation rules of perquisite taxation would be followed, employees would be liable to pay tax on the normal slab rates, resulting in a substantial increase in their taxes. Ultimately, the tax saved due to abolition of surcharge may get compensated by the taxation of perquisites in the hands of individual employees.
Maintenance of Dependant With Severe Disability Annual deduction available in respect of expenditure incurred on maintenance, including medical treatment, of a dependant with severe disability (more than 80 percent) has been raised from the present limit of Rs 75 thousand to Rs 1 lakh. The proposed amendment is likely to help individuals whose dependants have to go through treatment of severe ailments. Depending on the slab in which an individual falls, the saving can be up to Rs 7,500.
Interest on Loans for Higher Studies The scope of the annual deduction under Section 80E in respect of interest on loans taken for pursuing higher education has been expanded to include all fields of study including vocational studies. Students, who have taken an education loan to pursue a course, which was not covered till now, would be able to claim this deduction. This proposal contributes to significant tax savings for our students.
Further, the declaration of a scheme to provide full interest subsidy during the moratorium period on education loans taken from scheduled banks for pursuing approved courses of study in technical and professional streams from a recognised institution in India has been welcomed by students with a smile. This scheme will enable students from economically weaker sections to realise their dream of pursuing higher education.
Gifts to Come With a Price Gifts will now come with a price, heavier for those who planned their tax savings through gifts in kind. The Finance Bill 2009 has proposed to bring non cash gifts/gifts in kind into the tax net. At present, if the aggregate sum of all cash gifts from non-relatives exceeds Rs 50,000, the entire amount becomes taxable in the hands of the recipient. Non cash gifts are completely exempt from income tax, however, with effect from October 1, 2009, individuals who receive shares, jewellery, valuable artefacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to pay tax. However, similar to cash gifts, non monetary gifts will also be exempt, if received on the occasion of marriage, or by will/inheritance.
Wealth Tax The Budget 2009 has also increased the threshold limit for payment of wealth tax from existing 15 lakh to Rs 30 lakh. This will result in tax savings of Rs 15,000 for those having taxable wealth in excess of Rs 30 lakh. Individuals having net wealth between Rs 15 and 30 lakh have more reasons to rejoice, since the entire wealth tax amount would be saved.
Enhancement in Advance Tax Limit Further, there has also been an enhancement in the advance tax limit from Rs 5,000 to Rs 10,000. Thus, advance tax for the financial year 2009-10 would have to be paid only if the tax liability exceeds Rs 10,000.
The proposals in the budget might not have met the heightened expectations of all income groups, but the finance minister has set the ball rolling in the right direction towards simpler tax structures and has also build a hope for significant structural changes over the next few months from the promised new direct tax code. Extensive tax planning can be postponed until then and till the tax rules for valuation of perquisites are announced.