Major Changes to your taxes after Budget 2018
A detailed look at the changes made to taxes by the 2018 Union Budget
1. Long term Capital Gains Tax
Before budget 2018
As per section 10(38),
— Gains arising from sale of a capital asset being a long-term (held for more than 12 months) equity share in a company or unit of an equity-oriented mutual fund or unit of a business trust shall be exempt.
Provided:
— Such transaction is chargeable to Securities Transaction Tax (STT). Exemption is available if such sale transaction takes place on a recognised stock exchange.
After budget 2018
In order to minimize economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption u/s. 10(38) and to introduce a new section 112A.
As per section 112A,
— Gains in excess of Rs.1,00,000 arising from sale of a capital asset being a long-term (held for more than 12 months) equity share in a company or unit of an equity-oriented mutual fund or unit of a business trust shall be charged to tax at a flat rate of 10% without giving effect to indexation.
Provided:
STT has been paid on:
• Acquisition and transfer of such equity share
• Transfer of unit of an equity-oriented mutual fund or unit of a business trust
Exemption from STT on transfer is available if such sale transaction takes place on a recognised stock exchange.
However, all gains till 31st January 2018 will be grandfathered (i.e. Exemption u/s. 10 (38) would continue for all shares purchased before 31st January, 2018 and sold after holding them for more than a year).
The cost of acquisitions in respect of the long-term capital asset acquired by the assesse before the 01/01/2018 shall be deemed to be the higher of:
a). The actual cost of acquisition of such asset; and
b). The lower of:
• the fair market value of such asset; and
- the full value of consideration received or accruing as a result of the transfer of the capital asset.
Any long-term capital gains in excess of the cost of acquisition will be taxed at 10% without indexation.
Consider an example:
An equity share is purchased 6 months before 31st January, 2018 at Rs.100 and the highest price quoted on 31st January is Rs.140. The share is sold after 31st July, 2018 at Rs.180 after holding it for more than a year.
Cost of acquisition will be higher of -
Rs.100 and Rs.140 i.e. Rs.140
The taxable gain will be Rs.180-Rs.140= Rs.40. These gains will be chargeable to tax at a flat rate of 10% without indexation.
Impact
There will only be a small gap between taxes on sale of short-term and long-term equity share in a company or unit of an equity-oriented mutual fund or unit of a business trust.
These amendments will apply in relation to the financial year 2018–19 and subsequent years.
I. What are Equity oriented funds?
Mutual fund schemes that invest more than
a). In case fund invests in units of another listed fund
• 90% of the total proceeds of such funds is invested in the units of such other fund
• and such other fund invests 90% of its total proceeds in the equity shares of domestic companies listed on recognized stock exchange 65% of the corpus in equity are categorised as equity-oriented funds.
b). In any other case
• 65% of its total proceeds in the equity shares of domestic companies listed on recognized stock exchange
are known as equity-oriented funds.
II. What is Fair market value?
Fair market value has been defined to mean:
a). In a case of listed capital asset- the highest price of the capital asset quoted on such exchange on the 31–01–2018. However, where there is no trading in such asset on such exchange on the 31–01–2018 the highest price of such asset on such exchange on a date immediately preceding 31–01–2018 when such asset was traded on such exchange shall be the fair market value; and
b). in a case where the capital asset is a unit and is not listed- the net asset value of such asset as on 31–01–2018.
2. Changes to Tax on dividends from Mutual Funds
Before budget 2018
Dividends received from all mutual funds were tax-free in the hands of the investors. However, in the case of debt funds, the fund houses had to pay Dividend Distribution Tax (DDT). The DDT in debt mutual funds was introduced to reduce the bring bank fixed deposits and debt funds on almost equal footing. However, in an equity oriented mutual fund, there was no DDT.
After budget 2018
With effect from 01–04–2018, dividend from equity-oriented mutual funds will be subject to DDT at the rate of 10%, to provide a level playing field growth-oriented funds and dividend paying funds. The fund houses will have to deduct DDT before declaring dividend.
Impact
DDT will reduce the in-hand return to investor, if the dividend option is opted for. Dividend, however, remains tax-free in the hands of the investor.
These amendments will apply in relation to the financial year 2017–18 and subsequent years.
3. Changes to Education Cess
Before budget 2018
A cess of 3% of income tax payable was added to the tax liability. This 3 per cent constituted- 2% education cess and 1% senior secondary education cess.
After budget 2018
The budget proposes to hike the cess on income tax from current 3% to 4% to help cover the costs of government-sponsored programmes in health and education.
Impact
There will be an increase in the tax payable by all categories of tax payers.
4. The 2018 Standard Deduction
Before budget 2018
Medical bills of up to Rs.15,000 per financial year were reimbursable to employees by employers and this was tax-free for the employees. Transport allowance of Rs.19200 per financial year was also allowed to be paid to employees which was also not taxable in hands of the employees.
After budget 2018
The budget proposes to provide a standard deduction of Rs.40,000 from salary income to employees but also proposes to take away transport allowance and medical reimbursement.
Impact
Employees having any medical expenses were able to get a deduction of Rs.34,200 (i.e. medical reimbursement Rs.15,000+ Transport allowance Rs.19,200).
All employees whether having any medical expenses or not will get benefit of the standard deduction of Rs.40,000 i.e. extra deduction of Rs.5,800.
These amendments will apply in relation to the financial year 2018–19 and subsequent years.
Changes and Benefits for Senior Citizens in the 2018 Budget
1. Deduction in respect of health insurance premium
Before budget 2018
As per Section 80D,
• Investments made towards payment of health insurance premium and preventive health check-ups qualify for a tax deduction.
• Individual assessees can claim deduction for premiums paid towards health insurance of self, spouse, parents and children. HUF can claim deduction for insuring the health of any member of the HUF.
• The deduction that can be claimed by an assessee is up to Rs.25,000 for premium paid for self, spouse and dependent children if under the age of 65 and Rs.30,000 if above the age of 65 years.
• A further deduction of Rs.25,000 could be claimed, for buying health insurance policy for parents of the assessee. It is Rs 30,000 if either of the parents is a senior citizen.
After budget 2018
The limit of Rs.30,000 for senior citizens is now increased to Rs.50,000.
Impact
All senior citizens may get benefit of extra deduction of Rs.20,000.
These amendments will apply in relation to the financial year 2018–19 and subsequent years.
2. Deduction in respect of medical treatment of certain critical illnesses
Before budget 2018
As per Section 80DDB,
• A deduction of a sum upto Rs.40,000 paid for the medical treatment of certain chronic and protracted diseases such as Cancer, full blown AIDS, Thalassaemia, Haemophilia etc.
• This deduction is allowed up to Rs.60,000 where the expenditure is in respect of a senior citizens (60 or above) and Rs.80,000 for very senior citizens (80 or above).
• The above deduction is available to an individual for himself or a dependant relative. (Dependant in case of an individual means the spouse, children, parents, brother or sister of an individual)
• For HUF, it is available for its members. (Dependants for HUF means a member of the HUF)
After budget 2018
The budget proposes an increase in deduction limit to Rs.1,00,000 for all senior citizens.
Impact
All senior citizens may get benefit of extra deduction of Rs.40,000 and all very senior citizens will get extra deduction of Rs.20,000.
These amendments will apply in relation to the financial year 2018–19 and subsequent years.
3. Interest income from deposits
Before budget 2018
At present, a deduction upto Rs 10,000/- is allowed under section 80TTA to an assessee in respect of interest income from savings account.
After budget 2018
It is proposed to insert a new section 80TTB so as to allow a deduction up to Rs.50,000/- in respect of interest income from deposits (all fixed deposit schemes and recurring deposit schemes) held by senior citizens.
However, no deduction under section 80TTA shall be allowed in these cases. (This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019–20 and subsequent assessment years)
It is also proposed to amend section 194A so as to raise the threshold for deduction of tax at source on interest income for senior citizens from Rs.10,000/- to Rs.50,000/-. (This amendment will take effect, from 1st April, 2018)
Impact
The increase in tax exemption limit for interest income for senior citizens will be a big relief as this category derives most of its income from bank FDs and post office schemes.
These amendments will apply in relation to the financial year 2017–18 and subsequent years.
4. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
Before budget 2018
PMVVY is a Pension Scheme announced by the Government of India exclusively for the senior citizens aged 60 years and above which was available from 4th May, 2017 to 3rd May, 2018.
The scheme can be purchased by payment of a lump sum Purchase Price. The maximum purchase price limit was Rs.7,50,000.
After budget 2018
It is proposed to extend this yojana up to March, 2020.
Current investment limit proposed to be increased to Rs.15,00,000 from the existing limit of Rs.7,50,000 per senior citizen.
Impact
Senior citizens can now avail benefits of this Yojana for another 2 years and earn higher interest.
Read our analysis on the budget and its implications for the economy here Analyzing the 2018 Union Budget.
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