Currently, individuals are taxed at slab rates depending upon the level of income but the tax rates are very complex as they comprise of not only the basic rate (10% or 20% or 30%) but also tax levied on account of levy of education cess @ 2% & secondary and higher education cess @1% on the basic rate and surcharge

There are great expectations from the Union Budget 2016-17 on the tax front. The key expectations are summarised below:

1. Composite Tax Rates for Individuals

Currently, individuals are taxed at slab rates depending upon the level of income but the tax rates are very complex as they comprise of not only the basic rate (10% or 20% or 30%) but also tax levied on account of levy of education cess @ 2% & secondary and higher education cess @1% on the basic rate and surcharge. Further, in cases where the income exceeds Rs. 1 crore, the base rate has to be increased by the surcharge @ 12% which is in addition to the levy of education cess. For instance, the maximum tax rate for individuals having income exceeding Rs.1 crore is 34.608%.

In view of the government’s thrust on simplification of tax laws and make them user friendly, it is expected that there shall be composite rates for personal taxation which shall include the Basic Rate, the Surcharge, Education cess & Secondary and higher education cess shall be subsumed within the composite rates which could be 10%, 20%, 31% and 34% instead of present 10.3%, 20.6%, 30.9% and 34.608%. Earmarking of funds out of the tax collection for different purposes can be done internally.

2. Increase in Income Tax Exemption limit:

In order to provide relief to individual taxpayers and to stimulate consumption and encourage savings and keeping in view the lower inflation rate, it is expected that the basic exemption limit shall be hiked from existing Rs.2.50 Lakhs to Rs. 2.75 Lakhs. It may be pointed that in the last Budget, there was no increase in the basic exemption limit.

3. Clarity regarding taxability of surplus on sale of shares & securities – capital gains or business income:

Characterisation of income arising on sale of shares as to whether it is taxable as capital gain or business income has been a matter of widespread litigation and created a lot of uncertainty. Change in the treatment of income may have a significant impact on the tax liability. While long term capital gain arising (held for more than 12 months period) on listed equity shares subject to STT is tax exempt, the same income, if it is treated as business income, would suffer taxation at the rate of 30% ( in case of individual falling under the highest slab).

On this aspect, it is expected that the Finance Minister would implement the following recommendation of the ‘Income Tax Simplification Committee’:

a) where shares are shown as capital assets and held for 1 year or less, the tax authorities should be refrained from re-characterising the surplus on sale as business income, provided the surplus in a year is Rs.5 lacs or less
b) in case they are held for a period of more than 1 year, and shown as capital assets (and not as stock-in-trade), surplus to be taxed as long-term capital gains

4. Limit on deduction under section 80C, 80CCC and 80CCD (1) to remain unchanged to Rs.1.50 lakhs

The combined threshold limit of deduction of Rs. 1.50 lacs in respect of deductions under section 80C, 80CCC and 80CCD (1) is likely to remain unchanged in the coming budget.

5. Notional income from house property not to be taxed (in case of Deemed Let out Property)

At present, in case of individuals who own more than one house, the other house property is treated as a deemed let out property. In case of such properties, the notional rental income is taxed which is more in the nature of a “hypothetical income” rather than an “real income”.

At present, there is considerable slowdown in the real estate sector, the unsold inventory is estimated at 3 to 7 years annual demand. Under these circumstances, this notional taxation is against the economic principle of taxation of Real Income.

It is expected that income from house property will only be taxed where there is actual rental income and not on the basis of notional income. Also this will be in line with the proposal made in Direct Tax Code, 2010.