One of the most anxiously awaited events, the Union Budget 2018-19, was presented by Finance Minister, Mr Arun Jaitley on the 1st of this month.
The slowdown in growth has had an impact on job creation as well.
However, to address these macroeconomic issues, the Union Budget 2018-19 called for stepping up public investment. Relief to farmers, skill development, education, healthcare, infrastructure and benefits for senior citizens; are some of the key
areas that have been focussed on the build a “New India”.
And in the endeavour to double income of farmers by 2022, proposed to increase the Minimum Support Price (MSP) of all kharif crops by one-and-a-half times besides launching ‘Operation Green’ to boost production of tomatoes,
potatoes and onions.
- Long term capital gains on equity shares and equity mutual fund units is back
As many feared, the government has proposed to impose 10% tax on Long Term Capital Gains arising out of sale of equity shares and equity mutual fund units, on which Securities Transaction Tax (STT) is paid.
However, this tax is applicable only if the capital gains exceed Rs 1 lakh. Also, there will be no indexation benefit given to investors on equity funds.
Until now, if you held your equity investments—equity shares or units of equity-oriented mutual funds—for more than 12 months you didn’t have to pay even a single paisa of tax on your gains. This was one of the most crucial
aspects of equity investing that attracted thousands of investors.
According to the finance minister, this new tax regime will lead to “ a revenue gain of about Rs 20,000 crores in the first year. The revenues in subsequent years may be more.”
However, an important point to note is, the finance minister has proposed to ‘grandfather’ the gains made upto January 31, 2018. Giving an example he said, if an equity share is purchased six months before January 31, 2018
at Rs 100 and the highest price quoted on January 31, 2018 in respect of this share is Rs 120, there will be no tax on the gain of Rs 20 if this share is sold after one year from the date of purchase. However, any gain in excess of
Rs 20 earned after January 31, 2018 will be taxed at 10% if this share is sold after July 31, 2018.
Notably the new LTCG tax (@10%) will be effective from April 1, 2018 and levied only on LTCG of an individual exceeding Rs 1 lakh in a financial year.
Therefore, LTCG on equity shares and equity mutual funds realised after March 31, 2018 by an individual will remain tax exempt to
the extent of Rs 1 lakh per annum.
- Tax on dividends of equity-oriented mutual funds:
To create a level playing field for dividend and growth options, the government has also proposed to make the dividends declared by equity-oriented mutual fund schemes taxable at 10%. Therefore, the Dividends from equity mutual funds that
were earlier tax-free, now will attract a dividend distribution tax (DDT) of 10% w.e.f April 1, 2018.
This will be a major blow for retail investors who invested in the dividend plan of equity mutual funds with a view of generating regular tax free income.
So, should you avoid investing in equity shares and equity mutual funds?
No, continue investing in equities…
Over the long-term equity as an asset class still remains attractive to counter inflation. If your investment objective is wealth appreciation, want to clocking appealing real rate of returns, have a high risk appetite, have sufficient
time horizon (at least 5 years) before financial goals befall; equities particularly equity mutual funds are suitable.
Even after the imposition of 10% LTCG tax, equity mutual funds can earn you decent post-tax returns provided you take enough care to select the best mutual
As far as possible, prefer the growth option over dividend option; because with effect from April 1, 2018, 10% Dividend Distribution Tax (DDT) will be levied on equity-oriented mutual fund schemes. If your goal is to grow your wealth,
choosing the dividend option will end up eating away the accumulated profit at regular intervals. This will have an adverse impact on your path to wealth creation, as your profits will not be reinvested ––particularly in
case of a dividend pay-out option.
Hence, if you are not seeking regular income, it will be best to opt for the growth option. Dividends are often touted to be a benefit as it is tax-free income; however, dividend pay-outs get in the way compounding.
For tax saving purpose under Section 80C of the Income-Tax Act, 1961 consider Equity Linked Saving Schemes.
Strategically, given that equity markets are on high and market valuations seem stretched, taking the Systematic Investment Plan (SIP) route while investing in equity funds will be sensible to negotiate the market volatility better.
- Standard deduction of Rs 40,000 for salaried individuals
Section 16 provides for certain deduction in computing income chargeable under the head ‘Salaries’. From Assessment Year 2019-20 (applicable to Financial Year 2018-19) onwards, the Income Tax Act will allow a standard deduction
of up to Rs 40,000; or the amount of salary received, whichever is less.
Consequently, the present exemption in respect of Transport Allowance (except in case of differently abled persons) and reimbursement of medical expenses will be withdrawn. Other medical reimbursement benefits in case of hospitalization
etc., for all employees shall continue.
“Apart from reducing paper work and compliance, this will help middle class employees even more in terms of reduction in their tax liability. This decision to allow standard deduction shall significantly benefit the pensioners also,
who normally do not enjoy any allowance on account of transport and medical expenses,” the finance minister stated in his budget speech.
- Incentives for new employees
The finance minister announced that the Government will contribute 12% of the wages of the new employees in the Employees Provident Fund EPF for all the sectors for next three years.
Also, the facility of fixed term employment will be extended to all sectors.
- Incentive to encourage employment of women
To incentivize employment of more women in the formal sector and to enable higher take-home wages, the finance minister proposed to make amendments in the Employees Provident Fund and Miscellaneous Provisions Act, 1952 to reduce women
employees' contribution to 8% for first three years of their employment against existing rate of 12% or 10% with no change in employers' contribution.
- Health and Education Cess on Personal Income Tax
Starting Financial Year 2018-19, the “Education Cess on income-tax” and “Secondary and Higher Education Cess on income-tax” shall be discontinued.
However, a new cess, by the name of “Health and Education Cess” shall be levied at the rate of 4% of income tax including surcharge wherever applicable.
Therefore, this hike in cess on income tax from 3% to 4% would increase the tax payable by all categories of tax payers.
- NPS tax benefits extended to all subscribers
Under the existing provisions of the clause (12A) of section 10 of the Act, an employee contributing to the National Pension System (NPS) is allowed
an exemption in respect of 40% of the total amount payable to him on closure of his account or on his opting out. This exemption is not available to non-employee subscribers.
In order to provide a level playing field, clause (12A) of section 10 of the Act will be amended to extend the said benefit to all subscribers.
With this change, the tax benefit on NPS for non-salaried individuals will now be at par with salaried individuals.
- Proportionate deduction for single premium health insurance policy
The premium paid towards health insurance policies qualifies for deduction under Section 80D of the Income Tax Act.
The Finance Bill 2018 provides that, from Assessment Year 2019-20 (applicable to Financial Year 2018-19) onwards, in a case where premium for health insurance for multiple years has been paid in one year, the deduction shall be allowed
proportionately over the years for which the benefit of health insurance is available, subject to the specified monetary limit.
Currently the tax benefit on multiple year premiums can be claimed only in the year of payment made. And usually insurers offer discount on premium if you opt to pay for multiple years. However, from next financial year onwards, you will
be allowed to spread the tax deduction for the premium paid proportionately over multiple years.
- Exemption of TDS on Interest from Fixed Deposit for Senior Citizens
Currently, TDS is applicable on fixed deposits at the rate of 10%, for an annual interest income of above Rs 10,000. The Union Budget 2018-19 has been benevolent towards senior citizens.
Exemption of interest income on deposits with banks and post offices has been proposed to be increased from Rs 10,000 to Rs 50,000,
and TDS shall not be required to be deducted on such income under section 194A.
This benefit shall be available for interest from all deposits in banks, co-operative banks and post offices, including recurring deposit schemes.
However, if the interest income on such deposits is higher than Rs 50,000 the TDS will be triggered and the account holder has to file a tax return to get the refund.
But in case your income, as a senior citizen, is within the basic exemption limit and nil tax is payable by for the financial year, you can submit Form 15H for non-deduction of tax at source on the interest income.
- Deduction on Interest Income increased for Senior Citizen
At present, a deduction upto Rs 10,000 is allowed under section 80TTA to an assessee in respect of interest income from savings account.
A new section 80TTB has been introduced in the Union Budget 2018-19, so as to allow a deduction upto Rs 50,000 in respect of interest income from all deposits held by senior citizens.
While deduction under section 80TTB will be allowed upto Rs 50,000; the amount earned over Rs 50,000 would be taxable as per the slab rate of the senior citizens.
Further, no deduction under section 80TTA of Rs 10,000 on interest from savings account shall be allowed for senior citizens in these cases.
- Limit on health insurance increased for Senior citizens
Section 80D provides that a deduction upto Rs 30,000 shall be allowed to an assessee, being an individual or a Hindu Undivided Family (HUF), in respect of payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen, or medical expenditure in respect of very senior citizen.
The Finance Bill will now amend section 80D to raise this monetary limit of deduction from Rs 30,000 to Rs 50,000. With this, all senior citizens will now be able to claim benefit of deduction up to Rs 50,000 per annum (instead of the
previous Rs 30,000 per annum) in respect of any health insurance premium and/or any general medical expenditure incurred by them.
- Limit on medical expenditure in respect of certain critical illness increased for senior citizens
Section 80DDB of the Income Tax Act, provides that a deduction is available to an individual and HUF with regard to amount paid for medical treatment of specified diseases in respect of very senior citizen upto Rs 80,000 and in case of
senior citizens upto Rs 60,000 subject to specified conditions.
The Union Budget 2018-19 has now raised the limit of deduction (under section 80DDB) for medical expenditure in respect of certain critical illness, from Rs 60,000 in case of senior citizens and from Rs 80,000 in case of very senior citizens,
to Rs 1 lakh in respect of both senior citizens and super senior citizens.
The increase in the deduction limit for health insurance premium (under section 80D) as well as treatment of specified diseases (section 80DDB) is a welcome gesture in showing care and gratitude towards elder citizen. This will help compensate
a bit towards rising medical and healthcare expenses.
- Rationalization of the provisions of section 54EC
Section 54EC of the Income Tax Act provides that capital gain, arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer,
shall not be charged to tax subject to certain conditions specified in the said Section.
The Section also provides that ‘long-term specified asset’ for making any investment under the Section means any bond, redeemable after three years and issued by the National Highways Authority of India or by the Rural Electrification
Corporation Limited; or any other bond notified by the Central Government in this behalf.
The Finance Bill 2018, attempts to rationalise the existing provision relating to investment in capital gain bonds by providing that the exemption shall be available only in respect of long-term capital gains arising out of sale of immoveable
property (i.e. land or building or both) and investment in the bond shall be for a minimum period of 5 years from the existing 3 years.
Therefore, Section 54EC will now be amended so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period
of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified under the Section.
- Extension of Pradhan Mantri Vaya Vandana Yojana
Pradhan Mantri Vaya Vandana Yojana, which was earlier open for investment till 3rd May 2018, has now been proposed to keep open for investment till March 2020.
Apart from this, the limit of Rs 7.5 lakh per senior citizen would also be enhanced to Rs 15 lakh.
So now, a couple—if both are senior citizens—can invest up to Rs 15 lakh individually, or a maximum Rs 30 lakh as a couple in this scheme.
As the limit on investment has doubled, the pension amount too may double (interest amount being unchanged). Earlier the maximum pension that an investor would have earned under the scheme was Rs 5,000 per month; it will now effectively
increase to up to Rs 10,000 a month.
- Rise of social security schemes
Pradhan Mantri Jeevan Jyoti Beema Yojana has covered 5.22 crore families while 13.25 crore people have been insured under Pradhan Mantri Suraksha Bima Yojana.
Similarly, the government will provide services of micro insurance and pension schemes to 60 crore account holders under Pradhan Mantri Jan Dhan Yojana.
The Union Budget 2018-19 has a populist tone.
Although, investors in equity shares and equity mutual funds may be a bit disappointed with the introduction of long term capital gain on equities, the fundamentals of equities has not changed.
Make it a point to stick to your investment plans and continue with your investment allocation and strategy, so that you can gradually accumulate wealth for your key financial goals.
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This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.