Year 2018 in review: Significance of direct tax cannot go unnoticed as it impacts households

The standard deduction of Rs.40,000 meant that a pensioner who is at the highest tax bracket of 30% would save Rs.12,000 of taxes.

As the curtains draw on yet another year, the Cabinet’s recent move to make amounts withdrawn from the investment made in the New Pension Scheme (NPS) completely tax free is surely some reason to rejoice for the common man.

Presently, withdrawals from the scheme are exempt upto a threshold of 40% out of the maximum 60% that can be withdrawn at the time of retirement. It is now proposed to exempt the entire withdrawal of 60%. The balance 40% will continue to utilised for purchasing an annuity and would not be taxed until receipt of the annuity.

Needless to say, amendments in the law have to be carried out to give effect to this change and the same is expected to come through in the upcoming Interim Budget.

While there certainly appears an intent on part of the Government to end the year on a high note for the common man, it may be a good idea to walk down the timeline to revisit the major amendments that were witnessed in direct taxes in 2018.

One significant change was the decision to impose a 10% tax on long-term capital gains (exceeding Rs 1 lakh) on the sale of listed shares and equity-oriented funds, which were hitherto, completely exempt. The investors in the capital market do not get any benefit of indexation (which is generally available to determine the cost of acquisition). However, sufficient grandfathering provisions find a place in the law to shield acquisitions made prior to February 1, 2018.

To illustrate, if an investor acquired shares prior to February 1, 2018, for a sum of Rs 1 lakh and these shares are sold at Rs 5 lakh in December 2018, the investor can substitute the higher of either the actual cost or the actual consideration (subject to such consideration being less than the market value of the shares) as cost of acquisition in calculating capital gains.

In effect, this would mean that the existing holdings of an investor can still be tax-free. However, acquisitions on or after February 1, 2018, would be impacted by the amendment. In any case, small investors, whose gains in a year do not exceed Rs 1 lakh, will not be affected. Further, with the tax-free investment avenue of parking funds in specified infrastructure bonds to save capital gains now being restricted to only sale of land and/or building, these long-term capital gains would now add more revenue to the exchequer.

If the small investors who were motivated to participate in primary and secondary markets owing to the tax advantage that it gave, find this change as a deterrent, the salaried class left hoping for a major overhaul. Surely, the 2018 budget did confer an ad hoc deduction of Rs 40,000 on the salaried class. But, the benefit that was earlier available on medical reimbursement and transport allowance was taken away.

Essentially, most salaried employees would only receive a benefit of Rs 5,800 reduction in taxable income that results in a tax savings of a minimum Rs 290 and a maximum Rs 1,740, depending on the tax bracket of the employee. Major relief to salaried class, however, came about by an amendment made in the Gratuity law to increase the maximum amount of gratuity to Rs 20,00,000 to bring it on par with Central Government employees.

Pension class, essentially comprising senior citizens had some takeaways from the 2018 Budget. The standard deduction of Rs 40,000 meant that a pensioner who is at the highest tax bracket of 30% would save Rs 12,000 of taxes. Additionally, senior citizens were also made eligible receive tax free interest income of up to Rs 50,000 from deposits made in banks and post office, and the deduction available on medical insurance premia paid for the health of senior citizens was topped up by a further amount of Rs 20,000.

Another significant amendment that came about was that any deductions that is available to a taxpayer (referred to as Chapter VIA deductions) like, deduction for life insurance premia, housing loan principal education loan interest, donations made and medical insurance premia become eligible only if the income tax returns are filed with the due date which is generally 31st July or 30th September, depending on whether a taxpayer is subject to audit or not.

TO FREE OF COST FINANCIAL CONSULTATION FROM THE EXPERTS, CLICK ON Call Put Option Tips OR GIVE ONE MISSED CALL ON 9644405056 TO SUBSCRIBE US!