Mar 19, 2010

Budget 2010-11: Impact on Individuals


Unlike every financial year, there are not too many significant changes (except hike in tax slabs) proposed by budget 2010. Nevertheless, there are many minor changes having a direct bearing on your finances. All such known and little-known changes are outlined below:

Budget 2010 Review: Proposals Impacting All Individuals
1. Changes in tax-slabs: Reduction in tax liability is uniform for individual taxpayers (i.e., male, female and senior citizens) with the same income level. Unfortunately, there is
no change in the tax liability of individuals having income up to Rs 3 lakh. The exact savings due to widening of the tax slabs is as follows:

Income--------------------Savings

3 lakh------------------------nil
5 lakh------------------------20,600
10 lakh-----------------------51,500
20 lakh-----------------------51,500

To calculate the exact impact on your existing taxable income, use this tax impact calculator:


2. Infrastructure Bonds: Additional deduction of Rs 20,000 (u/s 80CCF) allowed for investment in long term infrastructure funds to be notified by the central government. This is also another interesting move which can lower your tax liability by as much as Rs 6,180 in addition to the reduction in tax liability up to a maximum amount of Rs 51,500 due to hike in tax slabs.

3. Gift of immovable property: Last year budget (Budget 2009) introduced taxation of gifts in kinds which also included transfer of immovable property without consideration or inadequate consideration effective from October 1, 2009. Now, budget 2010 has further amended the section 56(2)(vii) retrospectively to exclude immovable property transactions involving inadequate consideration (below stamp duty value). In other words, now tax will be imposed only if the transfer of immovable property is without any consideration.

4. Gift of Bullion: For those who thought that if gift of jewellery comes under the tax net, why not start receiving gifts in bullion?... Sorry, now this loophole is being plugged. Effective from June 1, 2010, the definition of ‘property’ under section 56 will include ‘bullion’.

5. New SARAL Form: ITR SARAL-II form consisting of two pages meant for individual salaried taxpayers will be introduced shortly which will make it easier for you to file the tax return on your own.

6. Joining bonus for NPS: One little known feature introduced by budget 2010 is the first time introduction of direct subsidy for individuals to encourage them to subscribe to New Pension Scheme (NPS). According to this innovative proposal , any individual who opens a NPS account during the FY 2010-11 with a minimum contribution of Rs 1,000 and maximum contribution of Rs 12,000 p.a. , government will co-contribute Rs 1,000 per year. And the incentive scheme will continue for another 3 years.

7. Housing Loan Subsidy: To provide a boost to affordable housing, the one per cent home loan subsidy introduced last year will continue for another one year. It is available on housing loan less than 10 lakh for purchasing property costing up to Rs 20 lakh.

8. Service tax on Property: This is the most controversial provision of budget 2010. Selling of under construction property by the developers / builders will now attract service tax thereby raising the cost of property. Consequently, installment purchase of immovable property will become liable for service tax. However, if the entire consideration is paid after completion of construction, then there won’t be any service tax.

It will result in additional tax outgo and consequent increase in the value of flats under construction by about 3.4% of price as service tax @ 10.3% will be charged on 1/3 portion of the total sale value.

Now property buyers will face another dilemma i.e., whether to go in for a constructed property (which is more expensive) or under-construction property and pay the service tax?


Budget Changes Impacting Small businesses & Professionals
1. Audit Compliance: There is a fifty per cent hike in the threshold limit for compulsory audit of books as per section 44AB of IT Act. Now audit will be required only if turnover / gross receipts exceeds Rs 60 lakh for business and Rs 15 lakh for professionals as against the present limits of Rs 40 lakh and Rs 10 lakh respectively.

2. Presumptive taxation: Ceiling for presumptive taxation of small businesses (under section 44AD of the IT Act) increased from current turnover / gross receipts of Rs 40 lakh to 60 lakh per annum.

3. TDS: The threshold limit for tax deduction at source (TDS) stands increased (effective from 1st July, 2010) as follows:

Payment--------------------------------------------Existing----- Proposed

Contractors (single transaction)--------------- 20,000---------30,000

Contractors (multiple transactions)------------50,000---------75,000

Fees for professional & technical services----20,000--------30,000

Rent---------------------------------------------120,000------ 180,000

Insurance Commission--------------------------- 5,000---------20,000

Commission / brokerage------------------------ 2,500----------5,000


Also see:

1. Tax Rates / Slabs FY 2010-11
2.
Impact of DTC on PPF
3.
TDS Salary - FAQs

10 comments:

  1. Does it make sense to invest in NPS or PPF, especially if your earning is below the tax limit? Since the returns in NPS is taxed, unlike in PPF, is there any utility from it? An incentive scheme of Rs 1000 for 3 years is not a great incentive, right? Or does it mean that till 2012, any schemes open in NPS will enjoy a Rs 1000 pay by Govt. till the age of 60? I'd be interested to know more on NPS. Anything that you have written on this earlier?

    ReplyDelete
  2. Pradeep,

    Good question!!

    For a person with earnings below the taxable limit, if the expected returns from other debt instruments are more than PPF & NSC, then he would be better off investing in such an instrument instead of PPF / NSC. Nevertheless, he should keep in mind the chances of his future income crossing the threshold income tax exemption limit.

    Right now, NPS is not attractive due to differential tax treatment of NPS & PPF. But once new tax code (DTC) kicks in, both the schemes PPF & NSC will be at par from tax point of view. High cost is another reason for the NPS scheme failing to take off.

    The NPS subsidy of Rs 1,000 per year will be available for a maximum period of 3 years only. I’ll cover NPS in detail shortly.

    ReplyDelete
  3. hi fisher
    i feel that a longterm bull run has started.can u name some 4/5 star rated funds in equity diversified largecap and some midcaps which give the option to swap or transfer to any other defensive(debt based) in the same fund house (like hdfc top200offers) in case of some thing worse happens (like another recession in west and wars).

    can u please tip of such mfs.iam planning to take part very agressively say3-5 years.iam eagerly waiting for ur reply.
    tks
    raja

    ReplyDelete
  4. On the infrastructure bonds investment part, where can one invest? Most information pointed to ICICI and IDBI but I did not find anything on the ICICI website. Also, should these bonds specifically be notified for this tax exemption? There are a few infra bonds available in the IDBI site but not sure whether any such investment will actually give this benefit.

    ReplyDelete
  5. Pradeep,

    The bonds will be notified by the central govt. after the approval of the budget. Currently, no such bonds are available.

    ReplyDelete
  6. Fischer,

    I ran into your blog quite accidently, and gladly. Your information, analysis and recommendations are excellent and absolutely to the point. Appreciate the dissemination of information, esp about insurance. For years i have been focusing on IRR as basis of buying insurance. the last time i bought insurance policies, was about 10 years ago, when the IRR was about 9%. Since then i have against them, since the IRR was always below 6%. Thanks for your effort.
    Barry

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  7. BTW what is your occupation? just curious, whether this is just plain interest or daily work?

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  8. Nice post...eagerly awaiting your review of NPS.

    ReplyDelete
  9. Hi...im a recent visitor to this site and have found it quite informative and comprehensive. Thanks for the effort! Just like others have mentioned I would certainly be interested in finding out more about the NPS Scheme. Do you think its worthwhile to invest in this scheme if we are anyways exhausting all limits for rebates/deductions. If we are comfortable investing upto Rs. 12,000/- would you advise to go in for the entire amount.

    Rgds,

    ReplyDelete

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