Jul 8, 2009

Budget 2009-10 Highlights - Tax Proposals Impacting Individuals

Union budget 2009-2010 was tabled by the Finance Minister Mr. Pranab Mukherjee in the parliament on July 6, 2009. This post gives you a detailed review of the budget proposals relating to income tax affecting the individual tax-payers.

Changes in Tax Slabs / Rates

1. Income Tax Slabs: Basic exemption limit raised
The budget has hiked the basic income tax exemption limit marginally by Rs 10,000 for women tax payers (from 1.80 lakh to 1.90 lakh), Rs 15,000 for senior citizens (from 2.25 lakh to 2.40 lakh) and by Rs 10,000 for other individuals (from 1.5 lakh to 1.6 lakh).

This is not significant as it will result in a reduction in tax liability by just Rs 1,545 in the hands of senior citizens, and by Rs 1,030 for women and all other individual assesses.

2. Surcharge on Income Tax: Abolished
The Union Budget 2009-10 also proposes to do away with the 10% surcharge on personal income tax. From the point of view of individual tax payers, this is the most prominent feature of the budget 2009-10 as the impact on the tax liability of individual assesses with taxable income above Rs 10 lakh is quite significant. For individuals having taxable income in excess of Rs 10 lakh, there is going to be substantial tax savings as the effective maximum marginal tax rate comes down from 33.99% to 30.90%.

For instance, for a male individual with a taxable income of Rs 15 lakh, total effective tax savings works out to be Rs 37,595. His new tax liability would be Rs 3,64,620 instead of Rs 4,02,215 earlier. Similarly for women assesses having taxable income of Rs 15 lakh, effective annual tax savings comes to Rs 37,286 and for senior citizens having taxable income of Rs 15 lakh the total reduction in annual income tax liability would be Rs 37,338.

3.Wealth Tax : Exemption limit enhanced
The budget 2009-10 has also increased the threshold limit for payment of wealth tax from existing 15 lakh to Rs 30 lakh. In other words, wealth tax is now payable on taxable wealth over Rs 30 lakh instead of Rs 15 lakh.

This is applicable from AY 2010-11 which means that you would have to pay wealth tax for the AY 2010-11 only if your ‘net wealth’ as on 31st March 2010 is in excess of Rs 30 lakh.

This will result in tax savings of Rs 15,000 for those having taxable wealth in excess of Rs 30 lakh. And, for those having ‘net wealth’ between 15 -30 lakh, the entire tax amount would be saved.

Section 80 Deductions

1.Loans for higher education: Scope enlarged
Scope of deduction under section 80E stands enlarged. Earlier deduction u/s 80E on account of interest on loan taken was allowed only for pursuing certain specified fields of study, but now the extended scope would cover almost all fields of studies including vocational studies pursued after completion of schooling.

At present, deduction u/s 80E is available for pursuing only full time graduate and post-graduate courses in engineering, management, medicine or post-graduate course in applied sciences or pure sciences including mathematics and statistics.

The Finance Bill 2009, proposes to introduce a new definition of higher education with effect from April 1, 2010. According to new definition, “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university duly recognized by Central Government, State Government, local authority or any other authorized authority.

Thus, now it covers the entire gamut of higher education.

2. Medical treatment / maintenance of handicapped dependants: Limit increased
Deduction under section 80DD for medical treatment / maintenance of handicapped dependent with ‘severe disability’ is proposed to be raised from present Rs 75,000 to Rs 1 lakh. Please note that limit for ordinary disability (i.e., disability which is not severe) remains same at Rs 50,000.

3. New Pension Scheme: Tax benefit extended to self-employed
At present, the benefit under section 80CCD for contributing to New Pension Scheme (NPS) is available to “employees” only. However, since the NPS schemes covers self-employed persons also with effect from May 1, 2009, it was necessary to amend section 80CCD to include self-employed.

Thus, section 80CCD is also sought to be amended by the budget 2009 to enable self employed persons to participate in the NPS and avail the tax deduction available thereto.

Taxation of Gifts

Non-monetary gifts: Exemption withdrawn
At present, cash gifts from non-relatives received (other than on the occasion of marriage, or by will / inheritance etc) are exempt up to a limit of Rs 50,000 per year. And if the aggregate sum of all cash gifts exceeds Rs 50,000, then the entire amount becomes taxable in the hands of recipient. Furthermore, as of now, gifts in kind are completely exempted from income tax irrespective of the value.

But, now Finance bill 2009 proposes to amend section 56 of IT Act to include transfer of property without consideration or inadequate consideration under the ambit of taxation. Put another way, while the limit of Rs 50,000 is retained, non-cash gifts are brought in the tax net. Thus, evasion of income tax through gifts-in-kind is no longer possible.

Effective from October 1, 2009 every gift of immovable property or movable property (shares and securities, jewellery, archaeological collection, or works of art such as paintings and sculptures) from non-relatives is taxable in the hands of recipient / donee if the value of gift exceeds Rs 50,000.

However, similar to cash gifts, non-monetary gifts also exempted if received on the occasion of marriage, or by will / inheritance etc.

Furthermore, please note that the limit of Rs 50,000 for gift of immovable property and another one of Rs 50,000 for movable property are in addition to the existing limit of Rs 50,000 for monetary gifts. So, now there are three separate limits for the purpose of taxation / exemption of gifts.

Taxation of Fringe Benefits & Perks

1. FBT Abolished
The Fringe Benefit Tax (FBT) on the value of certain fringe benefits provided by employers to employees introduced by Finance Act 2005, is proposed to be scrapped with effect from AY 2010-11.

It’s a major relief to employer's as it was really causing a lot of confusion and hardship to them regarding the taxation of employee benefits.

2. Perks: To be taxed in the hands of employees
Along with the abolishing of Fringe Benefit Tax (FBT), the budget 2009 proposes to restore the taxation of fringe benefits as perks in the hands of the employees. So with the shifting of tax burden on fringe benefits back to the employees, they will have to pay tax on perquisites such as Employee Stock Option Plans (Esops), employers’ contribution to superannuation funds and other perquisites to be specified in due course. Put simply, benefits presently liable to FBT will be taxed as perks in the hands of employees.

The Finance bill 2009 proposes to amend clause (2) of section 17 of the Income Tax Act, 1961 to include the value of Esops / sweat equity shares allotted or transferred, directly or indirectly by the employer or former employer free of cost or at concessional rate to the employee. Further, employers’ contribution to any approved superannuation fund in excess of Rs 1 lakh per annum will also be treated as perquisites.

Finally, the value of taxable perks shall also include any other amenity to be notified in due course. So, now benefits such as gift vouchers, free meals, cars, credit cards, club expenses etc provided to employees will again become part of taxable income of employees. Ultimately, the tax saved due to abolition of surcharge will get nullified by the taxation of perks in the hands of individual assesses.

Others direct tax proposals

1. Filing of Tax Returns: To be Simplified
To simplify the filing of tax returns, SARAL 2 income tax forms to be reintroduced at the earliest.

2. Taxation of NPS: Status Quo Maintained
There is no change in current status of New Pension Scheme (NPS). It will continue to be subjected to “exempt-exempt-taxed” EET method of tax treatment of savings. In other words, unlike PPF, EPF or NSC you will have pay tax at the time of withdrawal from NPS. Sorry, PFRDA could not succeed in wooing the Finance Minister.

3. Deposit of Advance Tax: Limit Enhanced
Threshold limit for payment of advance tax as per section 208 of IT Act raised from the present Rs 5,000 to Rs 10,000.

It is effective from 1st April, 2009. Thus, you would have to pay advance tax for the financial year 2009-10 only if your tax liability exceeds Rs 10,000.

Also see:

1. Section 80C Tax Saving Options
2. Beyond Section 80C – Other Deductions U/S 80
3. Tax Calculator FY 2008-09 (AY 2009-10)

4. Tax Calculator FY 2009-10 (AY 2010-11)
5. Investors Reforms in 2009
Health Mediclaim Insurance – Latest IRDA Circulars

7. Capping of ULIP Charges - Impact on Investors

1 comment:

  1. pl give complete comment on income tax
    dinesh joothawat FCA FCS LLb gen


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