7 Major Changes in the Income Tax Rules and Their Effect on Investors
It wouldn’t be wrong to say that the recent budget announcement 2018 has created a stir in the lives of common people. From the re-introduction of LTCG on stocks as well as equity mutual funds to the relief provided to the senior citizens on interest income- changes were immense.
In his Union Budget speech, Finance Minister Mr. Arun Jaitley has announced that the basic income tax rates and tax slabs will remain unchanged at least for the upcoming fiscal year. However, there were a number of other changes in the rules of income tax that will impact the Indian taxpayers as proposed by him. These changes have become effective from April 1’2018.
Go through the blog till the end to find out what were the major amendments and how will they affect your personal finances.
- Introduction of Standard Deduction of Rs 40,000
Instead of exemptions for medical reimbursements and transport allowance, salaried as well as pensioners can now get the benefit of standard deduction of Rs 40,000. However, in the case of differently-abled persons, transport allowance rates have been enhanced.
It has been proposed in place of existing deductions of Rs 15000 for medical reimbursement and Rs 19,200 for transport allowance. The change will directly benefit about 2.5 crore salaried employees. It should be further noted that the benefits arising from standard deduction depend on the tax bracket any individual falls in. Thus, there is no significant relief available to salaried people on this front as the major chunk of those used to avail these exemptions.
- Higher Cess
Although there was no proposal concerning the change in income tax rates in the Union Budget, there will be a new cess, i.e., Health and Education Cess. It will now be levied at 4 percent of income tax including surcharge in place of the earlier 3 percent which is made of 2% of Education Cess and 1 % of Secondary and Higher Education Cess with effect from the current fiscal year.
- Re-introduction of Long-Term Capital Gains Tax
This one is a real dampener which has greatly affected the investors. According to it, a new 10 percent tax excluding cess will be applicable on long-term gains exceeding the limit of Rs 1,00,000 upon the sale of equity shares or units of equity-oriented funds. These gains will be grandfathered until January 31, 2018, for the benefit of taxpayers.
Before, the long-term capital gains (LTCG) arising out of the sale of equity shares and equity-oriented mutual funds were free from tax under Section 10(38) of the I-T Act, provided the transactions were carried out on a recognized stock exchange and were liable to STT. Now, Section 10(38) has now been withdrawn, and a new Section 112A has been inserted w.e.f AY2018-19. Thus, along with a 10%tax on LTCG, they won’t be able to avail any benefit of indexation.
- Additional Income Tax Benefits on Single Premium Health Insurance Policies
Generally, health insurers provide some percentage of discount on paying the premium for a few years upfront. But earlier, an individual could claim a deduction of only up to Rs 25,000. It is proposed in the Budget 2018 that in case of a single premium health insurance policy which has a cover of more than one year, there will be deduction allowed on a proportionate basis for the number of years for which the cover has been provided, subject to the specified limit.
For instance, consider that your insurer is offering a discount of 10 percent on health insurance premium, and you pay an amount of Rs 40,000 for two years cover, then according to the proposed changes, the individual can claim Rs 20,000 in both the years.
- Income Tax Benefit on Nation Pension Scheme Withdrawal
Among all others, there was a proposal to extend the benefit of tax-free withdrawal from NPS to non-employee subscribers. As per the previous scenario, any employee who is contributing to the NPS was allowed an exemption of 40 percent of the total amount payable to him/her on the closure of the account or on opting out. However, this exemption was not available to non-employee subscribers. The change will be availed from April 1, 2018.
- Increased Income Tax Deduction Limit for Senior Citizens
Senior citizens can now enjoy the higher income exemption limit on deposits in post offices and banks, including recurring deposits. Previously, a deduction up to Rs. 10,000 was allowed to an individual under Section 80TTA of the Income Tax Act in respect of interest income from the savings account. Now, a new Section 80TTB is proposed to allow a deduction up to Rs. 50,000 on interest income from deposits held by any senior citizen.
Further, the government also proposed to extend Pradhan Mantri Vaya Vandana Yojana till March 2020 and increase the investment limit in it to Rs. 15 lakh from Rs. 7.5 lakh. The scheme is for senior citizens which offers a guaranteed interest rate of 8 percent.
There is also an increase in the deduction of health insurance premiums for senior citizens. The limit is made to Rs 50,000 from Rs 30,000.
- Tax on Dividend Income from Equity Mutual Funds
In the Budget speech, Arun Jaitley also proposed the introduction of DDT (Dividend Distribution Tax) for equity mutual funds. This is applicable at a rate of 10 percent, which is 11.648% including cess and surcharge) in order to provide a level field across dividend distributing and growth-oriented schemes.
This step will reduce the in-hand return to investors who opt for dividend scheme. Thus, all those who have been relying on dividends on equity funds such as schemes of Balanced Mutual Fund will now have to rethink their investment strategies.
We hope now you have a clear idea about the amendments that took place due to the proposal of new rules in the Union Budget 2018. It’s time to make new investments concerning the changed rules and prevent oneself from the eleventh-hour chaos. For all those who are looking forward to seeking recommendations from experts, it’s time to connect with us.
We, at MySIPonline, will be more than happy to serve you with all our might.
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