How will the budget 2014 impact your personal finances?
Tax Slabs Increased
The Budget brought some respite to savers in a high inflation environment. For senior citizens (above 60 years but below 80 years), the threshold limit increased from Rs2.50 lakh to Rs3 lakh. For others, threshold limit increased from Rs2 lakh to Rs2.50 lakh. For individuals above 80 years, there is no change; Rs5 lakh threshold continues. An individual will save a minimum of Rs5,150/- in taxes (Rs50,000*10.3%). An individual in the highest income slab will save Rs5,665 [Rs50,000*11.33% (including surcharge)].
Section 80C Limit Hiked
Taxpayers can now save more on tax, with a higher limit under Section 80C. The limit of investment under Section 80C has been increased to Rs1.5 lakh from the earlier Rs1 lakh. With this increase, an individual would save a minimum of Rs5,150 (Rs50,000*10.3%) and a maximum of Rs16,995(Rs50,000*33.99%).
Home Loan Interest
To encourage people, especially the young, to own houses, the tax exemption for interest paid on self-occupied house under a home loan has been increased to Rs2 lakh from Rs1.5 lakh earlier. The tax-savings for individuals would range between Rs5,150 and Rs16,995, depending on the income-tax bracket of the individual.
Additionally, on 15 July 2014, the Reserve Bank of India (RBI) announced a raft of measures to encourage bank lending. Therefore, home loans up to Rs50 lakh may get cheaper. Home loans to individuals up to Rs50 lakh (for houses of value up to Rs65 lakh) in metros and loans up to Rs40 lakh (home value Rs50 lakh) in other centres will be considered as affordable housing. Extending these loans will entitle banks to float infrastructure bonds which will not be subject to statutory reserve requirements.
The Finance Bill 2014 also made changes to the capital gains for the sale proceeds of a residential property re-invested. According to the new provision, you cannot sell one house and invest the money in two smaller houses to claim tax exemption from long-term capital gains. The Bill states that the benefit of long-term capital gains tax exemption can be availed only for re-investment in one residential house and that too has to be purchased in the country. However, the controversy about whether two adjoining flats constitute one residential house or not continues.
Under Section 54 of the Income-tax Act, 1961, an individual can get long-term capital gains tax exemption after selling his house property, which is held for more than three years, and purchase another residential house or construct a house within three years of the sale.
Tax Saving Bonds
Presently, the Income-tax Act provides a deduction from long-term capital gains if the amount of gains from selling capital assets is invested in certain bonds issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC) within six months from the day of the sale. The investment of capital gains in bonds for this Section 54EC exemption is now being restricted to Rs50 lakh both in the year of transfer of the capital asset and in the subsequent year, so that one can’t claim exemption of Rs1 crore for investments made in both the years. However, there is no mention about exemption for gain earned in the next year. For example, if you have claimed the full Rs50 lakh benefit in the previous year and sell another asset, whether this would come under the Rs50 lakh limit of the previous financial year or the current financial year, is not clear.
Debt Mutual Funds
In the Finance Bill, the concessional rate of 10% on long-term capital gains (LTCG) on sale of non-equity units has been withdrawn and the period of ‘long-term’ has been raised to 36 months from 12 months. With this, the tax for LTCG of debt mutual fund units will be at a single rate of 20% with indexation. However, a clarification on the applicability of this new amendment is yet to be announced. This will immediately impact fixed maturity plans (FMPs). Those who have invested in debt funds maturing in the next three years will be impacted.
The Finance Bill has also changed the calculation of dividend distribution tax (DDT). Dividends distributed by mutual funds will now be paid on a gross basis and not on the net amount of dividend paid. Therefore, the effective rate of DDT will now be as much as 39.52% compared to 28.33% earlier.
It has been wrongly assumed that all insurance policies are exempt from tax under Section 10 (10D). This Section only exempts amounts where the sum assured is less than 10 times the annual premium. Therefore, life insurance policy maturity, or surrender proceeds where Section 10 (10D) does not apply, will be subject to a TDS of 2% at the time of payment. If the amount received is less than Rs1 lakh, it will be exempt.
Save More in PPF
The investment limit in public provident fund (PPF) has been increased to Rs1.5 lakh from the earlier Rs1 lakh. PPF enjoys the exempt-exempt-exempt status; therefore, the contribution, the accumulation and withdrawal are all exempt from tax. This makes it a popular investment product. For the current financial year, the interest paid on investments continues to be 8.7%.
The finance minister has widened the list of investment products. The Kisan Vikas Patra (KVP), which was junked in December 2011, has been brought back. KVPs were available in denominations of Rs100 to Rs50,000. The details of the new scheme are awaited. A special small saving scheme focusing on education and marriage of the girl child has also been introduced. The National Savings Certificate (NSC) will also offer an insurance cover, providing additional benefit for the saver.
Single Demat and Uniform KYC
As a result of the steps taken to energise the financial market and encourage savings, investors may be able to access details of their investments across a wide range of instruments, not just shares and mutual funds, from a single demat account. There would also be one know-your-customer (KYC) requirement which can be used across the entire financial sector. These changes will enable consumers to access and transact all financial assets through one account. This has been on the planning board for a long time; implementation will be the key.
Single EPF Account
The single employee provident fund (EPF) account will enable over 50 million EPF members to obviate the process of transferring their accounts on changing jobs. At present, employees have to apply for transfer of PF accounts when they change jobs. This will benefit approximately 1.3 million PF transfer claims every year.