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Sunday, October 12, 2014

Seven (7) Income Tax related changes in Budget 2014 that you ought to know


Indian Union Budget 2014 came up with many surprises for an individual tax payer. Here are the 7 (seven) rule changes that you must leverage to the hilt. Remember that increasing the returns on your investments are as important as increasing your income, if not more.




(1) Increase in basic exemption limit 
The basic tax exemption limit has been increased from Rs. 2 lakh and Rs. 2.5 lakh, which means that there is an additional Rs. 50,000 per year for you on which the government will not levy any tax. Since this additional money was levied a tax of 10% earlier, this would result in an approximate tax saving of Rs. 5,150 for most individual tax payers.
Though small, but a welcome change for all individuals.

(2) Increase in the ceiling for deduction of interest on loan taken for purchase of house (section 24(b)): 
Taxpayers would get more from their housing loans. Ceiling of deduction on interest on housing loan has been increased from Rs. 1.5 lakh to Rs. 2 lakh in respect of self-occupied houses. For houses that are rented out, there was anyways no limit. Those who are paying high amount of home loan interest (more than 2 Lacs per year), the additional tax savings would be up to Rs. 15,450. 
This was long overdue and a welcome change for home loan seekers.

(3) Increase in the ceiling for deduction for investment (Sections 80C, 80CCC and 80CCE)
Ceiling on deduction on investments has been increased to Rs. 1.5 lakhs from Rs. 1 lakh. This allows the individuals to save tax on an additional Rs. 50,000 and depending on the tax bracket that they fall in, they can have tax savings of up to Rs. 15,450 (for 30% bracket). The common investments covered are EPF, PPF, Life insurance premium, housing loan repayment, children tuition fees, etc. 
This is another welcome change considering that the limit was set many years ago. 


(4) Tax exemption reinvestment on long term capital gains on sale of a house (Sections 54 and 54F): 
There was a lack of clarity about the quantum of tax deduction if taxpayer reinvested the amount of the long term capital gains (LTCG) in more than one house. The proposal seeks to clarify that the investment made only in one house would qualify for the tax deduction. Further, it is also clarified that the house to be acquired should be within India only.

(5) Tax exemption reinvestment of on long term capital gains on sale of any asset in capital gains tax saving bonds (section 54EC)
The tax law provides a deduction from long term capital gains if the amount of gains is invested in certain bonds within 6 months from the date sale of the long term capital asset. It further provides that the investment in such bonds in a financial year cannot exceed Rs. 50 lakhs.

(6) Taxation of income arising from non-equity oriented mutual funds: 
Until now, the units of non-equity oriented Mutual Funds were considered as long term capital assets if those were held for more than 12 months. This period has now been changed to 36 months. 
Currently, the taxpayers have an option to pay income tax on the long term capital gains on sale of such units at the rate of 10% without availing indexation benefit. This option has been taken off.
This would mean that the taxpayers would have to pay income tax at the rate of 20% after taking into consideration indexation benefit. 
These above changes would mean that the investments alternatives to Fixed Deposits such as FMPs would no longer be attractive unless the investments are made for more than 3 years. 

(7) Taxation of REITs (Real Estate Investment Trusts)
REITs are structurally similar to mutual funds and invest only in real estate assets. The tax treatment of investments in the units of listed REITs has been made at par with those of listed equity shares. Therefore, the long term capital gains on sale of units of listed REITs would be tax exempt and the short term gains would be taxed only @ 15%. This proposal would make investment in REITs very attractive from tax perspective.


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