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BUDGET 2018

By Anchal Jain


 

WHAT BENEFIT DOES THE SALARIED EMPLOYEE GET FROM THE BUDGET 2018?

Mr Arun Jaitely, the Finance Minister of India on February 1, 2018 introduced the Union Budget 2018.

 

From the viewpoint of salaried employee, the focus has been on the following:

  • Standard deduction.
  • LTCG.
  • Exemption to senior citizen.

 

 

 

STANDARD DEDUCTION

The Union Budget 2018 came as a slight relief to the salaried employees as the erstwhile standard deduction of INR 40,000/- is introduced again. However, this benefit of standard deduction does come with a cost which is, the employees will no longer be allowed the exemption under Transport Allowance of INR 19,200/- and Medical Reimbursement of INR 15,000/-. If we look at it carefully, we can interpret that before the standard deduction was introduced, a salaried employee was getting a total benefit of INR 19,000 + INR 15,200 = INR 34,200/- as compared to the now available deduction of INR 40,000/-.

Further, in order to avail the exemption under the category of transport allowance and medical reimbursement, the employee was required to submit the bills as a proof to avail the deduction. But, with the introduction of standard deduction, the requirement of proof is done away with, as all the employees are allowed to avail a flat deduction of INR 40,000/- on the income earned by them.

 

LTCG

The Union Budget 2018 has made the long term investments taxable which were exempt earlier, making it difficult for the individuals to save tax on their long term investments. With the introduction of tax on Long Term Capital Gain (LTCG) on selling of equity, equity oriented mutual funds or even the business units, in case the value of LTCG is above INR 1,00,000/-. The long term capital gain will be taxed at the rate of 10% and no indexation benefit shall be availed by the seller. The short-term capital gains tax of 15% remains unchanged.

However, there are 2 escape windows from being taxed which are:

  1. If an individual sells the instruments before 31st March 2018, then no LTCG tax shall be payable as the same is effective from 1st April 2018.
  2. If an individual sells the instruments post 31st March 2018, then no LTCG tax shall be payable up to the capital gain value of INR 1,00,000/-. The capital gain over and above INR 1,00,000/- shall only be taxable at the rate of 10% without enjoying the benefit of indexation.

In case the instruments are sold post 31st March 2018, the cost of acquisition (COA) can be determined as follows:

The COA of the instrument bought before 1st Feb 2018 shall be higher of:

  1. The actual cost of acquisition; or
  2. Lower of a) the Fair value consideration or b) the fair market value/net asset value as on 31st Jan 2018 or the last trade date i.e. Accrued capital gains up to January 31st are “grand-fathered” which means that they will never be taxed.

Example:

Let's say, you had invested INR 100,000/- in equity mutual funds a year ago.

You sell these funds after 31st March 2018 for INR 1,30,000/- after holding them for 1 year (from your actual date of purchase).

To compute your long term capital gains, you need to look at the value of your holdings on 31st Jan 2018. If, let's say, that value was INR 1,20,000/-, then your long-term capital gains will be INR 10,000/- (i.e. 1,30,000 – 1,20,000). To re-emphasise, you will calculate your taxable gains by subtracting the value on 31st Jan 2018, rather than the original purchase price. If original purchase price was higher than the value of holdings as on 31st Jan 2018, then the original purchase price will be subtracted to compute LTCG.

 

EXEMPTION TO SENIOR CITIZEN

Much to our surprise, The Union Budget 2018 has proven to be really kind towards the senior citizen, as it allows them to live a more dignified and relaxed life by proposing numerous exemptions to them, which are as follows:

  1. Tax exemption of interest income from bank deposits has been raised to INR 50,000 (currently, INR 10,000).
  2. It has been proposed to raise the deduction under health insurance premium under Section 80D of the Income Tax Act, 1961 to INR 50,000 (currently, INR 30,000).
  3. In case of senior citizens with critical illnesses the deduction under Section 80DDB will be INR 100,000/- (currently, INR 60,000/- and INR 80,000/- for person with age above 60 years and 80 years respectively)
  4. Moreover, Fixed Deposit/Post office interest income to be exempt upto INR 50,000/- under Section 80TTB. (newly inserted)

 

It can be inferred from the above points that a lot of amendments have been undertaken wherein some proved to be a benefit and others did not.

Consequent to the relief, an important change occurred with respect to the increase in value of education cess from 3% to 4%, along with altering the name to education and health cess. Though It is important to note that, there has been no change in the income tax slab rates.

Note: The proposals are subject to amendment as the Finance Bill is yet to be passed by the Parliament.

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