As far as budgets go, the finance minister Arun Jaitley’s fourth budget was a fairly straightforward one. And dear reader, if you haven’t bothered following it up until now, there is nothing more you need to do, than just read this piece. So, here are the seven most important things that you need to know about the budget:
1 For incomes between Rs 2.5 lakh and Rs 5 lakh, the rate of income tax has been reduced to 5 per cent. Earlier it was at 10 per cent. This would mean that anyone having a taxable income of Rs 5 lakh or more will pay a lesser tax of Rs 12,500.
2 The finance minister also said that he plans to introduce a simple one page tax return form for individuals having a taxable income of up to Rs 5 lakh other than business income. This promise of simplifying the income tax return form has been made in the past as well. Let’s see how properly it is implemented.
3 Data from past income tax returns shows that during the financial year 2013-2014 only 23.7 lakh individuals declared income from house property i.e. rental income. This basically means that most landlords do not declare their rental income while filing their returns.
Now on, any individual paying a rent of greater than Rs 50,000 per month, will have to deduct a tax of 5 per cent at source. As Sandeep Shanbhag, director of Wonderland Consultants, a tax and investment advisory firm, puts it: “It is also proposed to provide that such tax shall be deducted and deposited only once in a financial year through a challan-cum-statement.”
4 In its war against cash, the government has made it mandatory that no transaction above Rs 3 lakh will be permitted in cash. One thing that it missed out on here is the fact that gold worth lower than Rs 2 lakh can still be bought without showing any identity proof. In fact, this is how jewellers converted demonetised Rs 500 and Rs 1,000 notes into gold, on the night of November 8 and November 9, 2016, when the Modi government suddenly demonetised these notes.
5 Currently, a long-term capital gains tax on immovable property or real estate has to be paid, only if it has been held for three years. The capital gains made on any property sold in less than three years is added to the income for the year and taxed at the marginal rate of tax. The government has decided to reduce this holding period to two years. This is good news for those looking to sell homes bought anywhere between two to three years back.
6 The FM also said that “the base year for indexation is proposed to be shifted from 1.4.1981 to 1.4.2001 for all classes of assets including immovable property.” What does this mean? While calculating the capital gains on real estate that has been sold indexation benefits are available. Indexation essentially allows the seller of real estate to take inflation into account while calculating his cost price.
If the property had been bought at any point of time before April 1, 1981, the price as on April 1, 1981, would have be taken into account while calculating the capital gains. This date has now been moved to April 1, 2001. This basically means that anyone who had bought property before April 2001, gets the price of April 2001 as the cost price, while calculating the capital gains. In the process, the capital gains made will come down.
As Jaitley put it: “This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets.” What this means in simple English is that more people will be incentivised to pay income tax rather than carry out a part of their transaction in black.
7 The government has also inserted a section into the Income Tax Act which essentially states that: “set off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year.” What does this mean? If you have a bought a home by taking on a home loan and are living in it, then you don’t need to worry. Currently, a deduction of Rs 2 lakh can be made against other heads of income for paying interest on a home loan, while calculating taxable income. This continues.
As Shanbhag puts it: “Up until now, the Interest paid on a housing loan could be set off against other income (say salary) i.e. the loss from house property could be adjusted against salary income to reduce the final tax liability. On second homes, this was much more significant as the entire interest without any limit (after first adjusting against a real rental income or a notional rental income in case the house was not rented) could then be further adjusted against incomes from other heads (like salaries etc).” Thus, the tax to be paid, could be massively brought down.
As Shanbhag further puts it: “Now, this adjustment against other heads of income has been restricted to Rs 2 lakh per year. Any unabsorbed interest can be carried forward but then will be subject to similar restrictions the following year. In one stroke, the tax arbitrage related to the housing sector has vanished.”
The government has basically plugged a loophole. Hence, now irrespective of the number of home loans that an individual has, the set off cannot be more than Rs 2 lakh per year.
(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at email@example.com)