This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in
Budget 2016 has got presented in the Parliament today and I would like to highlight the key announcements here on this forum for a further discussion and deep understanding:
* Global Slowdown – Global growth has slowed down from 3.4% in 2014 to 3.1% in 2015.
* Indian Growth Strong – India is a ‘bright spot’ amidst a slowing global economy. The World Economic Forum has said that India’s growth is ‘extraordinarily high’. The growth of GDP has now accelerated to 7.6%.
* Inflation in Control – CPI inflation has come down to 5.4%, providing big relief to the public.
* Drastic Fall in Current Account Deficit – The Current Account deficit has declined from $18.4 billion in the first half of last year to $14.4 billion this year. It is projected to be 1.4% of GDP at the end of this year.
* New Health Insurance Scheme – A health insurance scheme which protects one-third of India’s population against hospitalisation expenditure is also being announced.
* Tax-Free Infrastructure Bonds – To augment infrastructure spending further, Government will permit mobilisation of additional finances to the extent of Rs. 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority through raising of Bonds during 2016-17.
* Retail Investment in G-Secs – To improve greater retail participation in Government securities, RBI will facilitate their participation in the primary and secondary markets through stock exchanges and access to NDS-OM trading platform.
* Boost to Commodities Market – New derivative products will be developed by SEBI in the Commodity Derivatives market.
* Bank Recapitalisation – To support the Banks in these efforts as well as to support credit growth, I have proposed an allocation of Rs. 25,000 crore in BE 2016-17 towards recapitalisation of Public Sector Banks.
* PSU Bank Transformation – The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50%.
* Listing of General Insurance CPSEs – Public shareholding in Government-owned companies is a means of ensuring higher levels of transparency and accountability. To promote this objective, the general insurance companies owned by the Government will be listed in the stock exchanges.
* Fiscal Deficit Targets – The fiscal deficit in RE 2015-16 and BE 2016-17 have been retained at 3.9% and 3.5% of GDP respectively. While doing so, I have ensured that the development agenda has not been compromised.
Relief to small tax payers:
Rebate u/s 87A Raised from Rs. 2,000 to Rs. 5,000 – In order to lessen tax burden on individuals with income not exceeding Rs. 5 lakhs, I propose to raise the ceiling of tax rebate under section 87A from Rs. 2,000 to Rs. 5,000. There are 2 crore tax payers in this category who will get a relief of Rs. 3,000 in their tax liability.
Deduction u/s 80GG Raised from Rs. 24,000 to Rs. 60,000 – The people who do not have any house of their own and also do not get any house rent allowance (HRA) from any employer today get a deduction of Rs. 24,000 per annum from their income to compensate them for the rent they pay. I propose to increase the limit of deduction in respect of rent paid under section 80GG from Rs. 24,000 per annum to Rs. 60,000 per annum, which should provide relief to those who live in rented houses.
Measures to boost growth and employment generation:
Cut in tax rates for new manufacturing companies – The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.
Cut in corporate tax rates for small enterprises with up to Rs. 5 crore turnover – I also propose to lower the corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding Rs. 5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.
Measures for moving towards a pensioned society:
NPS Withdrawal Partially Tax Exempt Now – I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme (NPS).
EPF Withdrawal Partially Taxable Now – In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.
Annuity to Legal Heir Tax Exempt – Further, the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases. Also, we are proposing a monetary limit for contribution of employer in recognized Provident and Superannuation Fund of Rs. 1.5 lakh per annum for taking tax benefit.
NPS/EPF Annuity Service Tax Exempt – I propose to exempt from service tax the Annuity services provided by the National Pension System (NPS) and Services provided by EPFO to employees.
Service Tax on Annuity Policies Reduced – I also propose to reduce service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of the premium paid in certain cases.
Measures for promoting affordable housing:
Tax Incentives to First Time Home Buyers – For the ‘first – home buyers’, I propose to give deduction for additional interest of Rs. 50,000 per annum for loans up to Rs. 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs. 50 lakh.
Boost to REITs – I propose that any distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax (DDT).
Additional resource mobilization for agriculture, rural economy and clean environment:
10% DDT on Rs. 10 Lakh Dividend Income – I propose that in addition to DDT paid by the companies, tax at the rate of 10% of gross amount of dividend will be payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs. 10 lakh per annum.
Hike in Surcharge from 12% to 15% – I also propose to raise the surcharge from 12% to 15% on persons, other than companies, firms and cooperative societies having income above Rs. 1 crore.
TCS of 1% on Cars & Luxury Goods – I also propose to collect tax at source at the rate of 1% on purchase of luxury cars exceeding value of Rs. 10 lakh and purchase of goods and services in cash exceeding Rs. 2 lakh.
Hike in STT on ‘Options’ – Rate of Securities Transaction tax (STT) in case of ‘Options’ is proposed to be increased from 0.017% to 0.05%.
Hike in Service Tax from 14.5% to 15% – I propose to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June 2016.
1% Infastructure Cess on Small Cars, 2.5% on Diesel Cars & 4% on Big Cars & SUVs – The pollution and traffic situation in Indian cities is a matter of concern. I propose to levy an infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs.
Hike in Excise Duty on Jewellery – I also propose to impose an excise duty of ‘1% without input tax credit or 12.5% with input tax credit’ on articles of jewellery.
There has been no change in the tax slab rates and tax deductions u/s 80C, 80D etc. So, no material change would be there as far as individual taxation is concerned. Some people would be disappointed about the EPF withdrawal getting taxable, but I think it was required to have a uniformity between EPF and NPS. So, I think it is a good move.
Moreover, as feared earlier, I think the budget did not have any major negatives in the form of long term capital gain (LTCG) tax on equity transactions or increasing the LTCG holding period to 3 years or a 2% hike in Service Tax. Finance Minister Mr. Arun Jaitley has tried to make a balance between the government’s financial constraints and the task of improving the growth momentum. Going forward, much will depend on the global economic conditions and how fast the government is able to push economic reforms.
Are you satisfied with Budget 2016? What could have been done to make it a good budget for you? Please share your thoughts about it here. If you need any clarification regarding any of the proposals, please let me know and I’ll try my best to answer it as soon as possible.
A middle class man can just find the word ‘hike’ everywhere! I didnt really like the decision of making EPF Withdrawal Partially Taxable. Thanks anyways for the post brother.
Sorry about multiple postings on the issue – please ignore the message posted on 14th April please. Thanks Ram
Dear Shiv, Can you please let me know what happens if I get dividends of 12 lacs from equity, 4 lacs from equity mutual funds, and 5 lacs from debt mutual funds? Do I have to pay 10% tax on 21 lac rupees or is it only on the amount in excess of 10 lac rupees?
Dear Shiv, Assume that I get dividends of Rs. 12 lacs this year. Can you please clarify whether I need to pay 10% of 12 lac rupees as dividend tax or should I pay 10% of 2 lacs that exceeds the 10 lac limit.
thanks
Ram
Niveza India review: Last weekend Indian government had cut the rate on all small saving schemes such as Kisan Vikas Patra, PPF, Post office savings. Cutting the rates on these schemes will bring down interest cost of government as they will have to pay less interest now. This will help them in fiscal deficit and it will prompt RBI also for a possible rate cut in coming policy.
Taking cures from this news, all cement stocks, and banking stocks were up today. Ambuja Cement, Ultratech rallied 3-4% while SBI, ICICI, Axis, Yes bank rallied between 2-4% today. There is a high chance of 25 basis point rate cut in coming policy by RBI now.
IDBI bank was up by 4-5% today, the news came in the market about its possible stake sale to strategic investor. Some of the investors such as International finance corporation, PE firm from US and CDC group from UK are interested in buying stake in the bank and have started discussions with the government. Also LIC will finance IDBI about 850 crores through preferential allotment. All these news lifted the sentiments and stock went up by 4-5 % with heavy volumes.
Hi Shiv,
Are we going to get tax free binds issues this FY as per busget
Reg
Kumar
Hi Kumar,
No tax-free bond issues will be there in the next financial year.
EPF, PPF, NPS Withdrawal Tax – Government Clarifications – http://www.onemint.com/2016/03/01/epf-ppf-nps-withdrawal-tax-government-clarifications/
Service tax has been increased by 20% over past one year. Hotel and other businesses collect service tax from us but do they deposit it with govt. ?:D
If they do not, they are liable to get fined heavily and prosecuted. That is what this government needs to work on.
I believe the Govt will not issue Tax Fee Bonds from the next Financial Year. Infrastructure bonds may be issued but in them the interest is not tax free.
Hi Vin,
Clarity is still required as far as these bonds are concerned. Let us wait for the same.
I also saw some videos on ET now where it is said PPF withdrawal will be taxable like NPS/EPF so got really confused. Shiv, could you please comment on this. Thanks.
Hi Tarun,
Whatever information I have till now, PPF is still tax exempt. Let’s wait for more clarity on that.
Hi Shiv, I read conflicting information on PPF being treated same as NPS/EPF, could you please throw some light on if PPF is still as it used to be – EEE ? I read posts above confirming that but just asking to re-confirm since on one of places I read that Jayant Sinha clarified this saying PPF will be treated same ad NPS/EPF. Thanks in advance and sorry to repeat the same question.
Dear Sir,
Tfb will be in more demand as EPF is taxed.
That is quite possible Pradeep!
EPF part is not clear, please can we have a post on it. Thanks
What are the questions?
EPF withdrawal up to 40% will be tax exempt and rest will be taxable for the corpus created with contributions made after April 1, 2016. I’ll try to do a post on the same.
Dear Shiv,
Are there any changes in PPF withdrawl rules ? Does it continue to be tax-free ?
Thanks
TCB
Hi Priyajit, Hi TCB,
PPF does not fall under the category of superannuation funds and recognized provident funds which have been made taxable, so it continues to be tax-free on withdrawal.
Is the new taxation of 60% on withdrawal from PF fund applies to PPF also?
Hello Shiv,
In my opinion, this is a pro farmer budget which does very little for the salaried class. Consider the fate of someone who has been contributing to EPF as a planned retirement investment for over 10 years with 20 more years to go. EPF has now been converted into an EET regime and to ththe best of my knowledge there is no clarity yet on what kind of annuities one can buy and on what financial terms. This is just grossly unfair.
Hi Salil,
Tax will be imposed on the corpus withdrawals for the contributions made w.e.f. April 1, 2016 and not for your past contributions. Annuities will be on the similar lines as it is there for NPS. As it is a new system with which we are not familiar, we are getting scared. I don’t think it is a that bad thing.
Epf is not EEE. 1.5 lakh may not necessarily be in epf.
I may be contributing money on which I have paid tax.
How can such money be taxed?
It is double taxation.
Hi Anuj,
Yes, if you are not contributing to EPF for tax saving u/s 80C, then it could be termed as double taxation. But, somebody not eligible to contribute to EPF for tax saving u/s 80C doesn’t change its tax status i.e. it is an ‘EEE’ investment product at present.
Many were saving in EPF as voluntary contribution. Now their contribution will be taxed twice so they have no option but to invest in FD as only interest is taxed
Hi Pradeep,
The government thinks there was anomaly earlier with EPF withdrawal tax exempt and NPS withdrawals were taxable, so it has tried to end that. Now, NPS and EPF will have a parity with terms & conditions of investments and withdrawals.
Intend of EPF is not tax saving but a way to secure the retied life of people who don’t get pension.
1.5 lakh for Middle class gets consumed in tutuion fees, insurance premium, NSCs, ppf etc.
We are forced to contribute to EPF to get employer share.
So for some it can be EEE but for many it is TEE which has now become TET and thus double taxation.
Looks like outcry has forced govt to clarify that only interest will get taxed and not the contribution. This is also wrong but may be a clever way by govt. to scare people first and then clarify that only interest will be taxed.
Salaried class is the only one who is forced to pay income tax as they don’t have much ways to evade tax. That class is not being targeted for more revenues. Why the govt’ can get the business class to pay their honest taxes and take away the exemptions from them.
This govt. is also turning like UPA and going back on promises.
I don’t think this government is working badly. It is just trying to remove the anomalies that were present in the system for years. Now, it has also been made clear that if the 60% corpus on withdrawal is invested in annuity, it will be tax-exempt. So, that makes it comparable to NPS. More clarity will be given by the finance ministry later today. Let’s see how it goes.
Hi Shiv,
Are Withdrawal’s on Public Provident Fund (PPF) also taxable ?
No Suresh, PPF withdrawals are not taxable.
10% DDT on Rs. 10 Lakh Dividend Income – Is it only for debt mf or equity mf also? Can you clarify? Thanks
Hi Sundararajan,
It is on all sorts of dividend income combined.
The focus on Agriculture is impressive but 15% Service Tax is unpardonable. Why does the middle class get no respite?
Again why 8000 crore allocation for Swach Bharath on top of the .5% tax.
Also the same MNREGA which was criticised heavily has been given a huge allocation. MNREGA impacts farming as farm labour is lost to MNREGA projects which are seen as easy money.
Its a amazing budget where no industry gains except companies involved in govt Infrastructure projects.Seriously where is the gain we got from oil fall we just keep seeing more and more taxation with zero benefits.
Hi Harineem,
1. 0.5% increase in Service Tax = Rs. 125 per month if you spend Rs. 25,000 a month using such services.
2. MNREGA was never criticised for its intent, but the way the money got wasted by the UPA government without any actual benefits earned out of it.
3. The industry has put the onus of kickstarting the halted economy on the government and the opposition is crying foul in front of poor people/farmers that this government does nothing for them. Probably that is the reason why the government has allocated maximum funds to its agricultural and infrastructure projects.
4. The government has cut the petrol prices by Rs. 3.02 a litre effective midnight.
Shiv
Its 15% of 25000 = 3750
Some of my farmer friends tell me they have no farm hands thanks to MNREGA because these guys get 200 after just 2 hours and some spend it on alcohol and do no work for rest of the day.
Most of the the time the work is not even useful work. I dont know how the govt will address that.
Hi Harinee,
We were paying Rs. 3,625 earlier as well, so only Rs. 125 additional service tax will have to be paid. Moreover, the government cannot stop you wasting your money on alcohol or cigarettes or any other thing which is not of social benefits. I think this government is trying to use the taxpayers’ money wisely, but I agree it cannot be foolproof.
Seriously Shiv what makes you assume its on alcohol or cigarette. Some of us eat outside as we travel far for work and have seen a steep hike in food prices.Also shopping for clothes we see same cess.
It became 3625 under the same govt.
I am neither for or against the govt I would like to be objective and support for what I see are right things.
Considering how taxes we pay have landed in Swiss banks I dont think common man has any motivation to pay more.
Employed people are the ones who regularly pay taxes as they dont have the option to work around their taxes like individual businessmen or corporates.And still its this same group which keeps getting penalised. Taxing EPF is not wisdom.
I think I misunderstood your response please ignore the alcohol or cigaretter part I think you meant MNREGA .
Yes, I meant it for MNREGA only. I know we people work very hard to earn our bread and butter, so I am with you on that. Also, I too do not favour any government and I just want India to grow, but I think this government is facing troubles due to the past mistakes committed by the UPA government.
Also, at the time when the government finances are in trouble and there was an expectation of a 2% hike in service tax, a modest 0.5% increase should be welcomed. It is not this government which has introduced the whole of 15% service tax, we have been paying it for the past 10-15 years I guess. So, blaming this government for the whole of it is not justified.
Tax on EPF withdrawal has been introduced to have a parity between NPS and EPF. Asking for NPS withdrawal to be tax-free and criticising the government for making the EPF withdrawal taxable is not right I think. We want everything to be tax-free and probably that is natural. But, that cannot be done. Making tax evasion impossible is what this government should work on, whether you are a businessman or a corporate or a salaried individual or a politician.
Yup.. You are somewhat right but taxing the retirement money from the salaried guy who has served whole of his life to the nation (without evading any tax by any chance) is not morally right. The govt has to really concentrate on taxing the peoples who hardly pay tax or no tax while using all loopholes to evade. These peoples include huge trader community, real estate dealers and corrupt businessmen in small towns to large cities.
First they don’t pay any taxes, then they ask government to provide them security, roads, infra, power, clean water. Society can only grow in better way if everybody shares to equal extent of what they earn and give back to government as taxes. Right now, salaried class is used by govt to milk and the other class uses all kind of loopholes to hide. This kind of imbalanced taxation is much bigger inequality than rich-poor divide and that’s why Indian society, cities are facing and will continue to face huge problems at present and in future.
As an example, Recent Haryana Jats agitation impact on place vis-a-vis large number of taxpayers presence in that place. Why there was lesser impact in large taxpayers city like Gurgaon than any other place? The place which gets major share of taxes, it will be even well protected by govt/police at all cost. Investments happen in those places where there is promise from govt to protect investment and large taxpayers base also. The problems happened in vulnerable smaller cities. Blaming everything on government is not right when one don’t want to fund it via your taxes. If one has evaded taxes and wanna continue to do it on future, then he should expect/deserve similar kind of government in his place or life.
I agree with you abc! Now is the time when the government should become super-active in punishing the tax evaders and clean up its systems. But, the government alone cannot do everything. We should also take up our responsibilities and help the government in all the possible ways we can. Jat agitation and their shameful acts should be condemned in every possible manner. NDA lost the Bihar elections badly and opposing reservations was probably one of the reasons for that. The country is in a bad shape because of these reservations only and Indian voters must understand that.
Honestly NDA losing Bihar and Delhi was a loss more to Bihar and Delhi than NDA especially Delhi.
Till we see some kind of accountability in cases like Vijay Mallya there will be a trust deficit. This guy has practically run down all banks and govt is taxing all to save these banks. Yet he roams free, spends 6 cr on a birthday party and the legal loopholes help him get out.He is already exited UB now he is probably exiting the country and our govt will give excuses of extradition.