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The much awaited and one of the most important financial event  for the year 2011-12 is now over.I am attempting to decode the aspects mentioned in the Union budget and how it impacts us and our livelihood. To start with, let me start with the item which affects us most directly.

Personal Income Tax

1. The personal income tax slabs have been increased as follows :

Tax Slab for General Tax Payer

Tax Slab for Women Tax Payer

Tax Rate Year 2011-12 (Old) Year 2012-13 (New) Year 2011-12 (Old) Year 2012-13 (New)

0%

Upto 1.8 lacs Upto 2 lacs Upto 1.9 lacs Upto 2 lacs

10%

1.8 lacs to 5 lacs 2 lacs to 5 lacs 1.9 lacs to 5 lacs 2 lacs to 5 lacs

20%

5 lacs to 8 lacs 5 lacs to 10 lacs 5 lacs to 8 lacs 5 lacs to 10 lacs

30%

Above 8 lacs Above 10 lacs Above 8 lacs Above 10 lacs

Senior Citizen (Age 60 – 80 years)

Very Senior Citizen (Above 85 years)

Tax Rate

Year 2011-12 (Old) Year 2012-13 (New) Year 2011-12 (Old) Year 2012-13 (New)

0%

Upto 2.5 lacs Upto 2.5 lacs Upto 5 lacs Upto 5 lacs

10%

2.5 lacs to 5 lacs 2.5 lacs to 5 lacs

20%

5 lacs to 8 lacs 5 lacs to 10 lacs 5 lacs to 8 lacs 5 lacs to 10 lacs

30%

Above 8 lacs Above 10 lacs Above 8 lacs Above 10 lacs

BFA Union Budget 2012

Every person earning over Rs. 200,000 shall get a tax rebate of minimum Rs. 2,000 due to increase in tax slab from 1.8 to 2 lacs.  Further, a person earning Rs. 10 lacs was earlier paying Rs. 1,52,000 tax on an annual basis (ignoring any tax rebates under the act). Under the new tax slabs, the same person shall be paying Rs. 1,30,000 tax on an annual basis. Hence, as a result of the budget the overall tax saving would be maximum Rs. 22,000 per year. However, for a person earning between Rs. 2 lacs to Rs. 8 lacs salary shall be saving only Rs. 2,000 of tax. This is a bit of tax anomaly created in this year’s budget where a person earning higher incomes (more than Rs. 8 lacs) are benefiting disproportionately more by lesser tax outflow as compared to last year.

2. Interest upto Rs. 10,000 from saving bank account shall be exempt from Tax. This exemption is not allowed for NRIs.

3. A new equity scheme shall be introduced in the name of Rajiv Gandhi Equity Saving Scheme. Retail investors having annual income of less than Rs. 10 lacs shall be allowed income tax deduction of 50% over the investment amount if they invest directly into Equity shares. The overall investment limit under this scheme shall be upto Rs 50,000 and will have a lock-in period of 3 years. Further details are awaited on this scheme. However, it is worth mentioning that this would boost capital building in the economy.

4. A new Capital Gain exemption has been introduced whereby if a person (individual / HUF) invests the net proceeds arising from the sale of a residential property (whether house or a plot)  in Equity shares of a specified company, then the long term capital gain shall be exempt from tax. The company should be a SME and after investment, the person should hold 50% or more voting right in the company. Such company should be in the business of manufacturing any article and must purchase assets from the receipt of funds within 1 year from the date of allotment of shares. Basically the Finance minister wants the proceeds of sale of house to be used in starting / supporting a new business venture.

5. Medical Insurance premium under Section 80D has been widened. Earlier a person could get deduction upto Rs. 15,000 towards medical insurance premiums paid. A further deduction of another Rs. 15,000 was available towards medical insurance premiums paid for the parents. Now even expenses paid towards the preventive health checkup of a person, their wife and dependent parents upto Rs. 5,000 are included under the deduction. To clarify, the deduction amount of Rs. 15,000 has not increased, but under the allowable expenses, a person can claim expenses for preventative health check. This is a nice provision to encourage the habit of regular health checks in India and help in detecting & curing of any diseases.

6. TDS on Purchase of Property – This is an interesting section introduced in this year with effect from 1 Oct 2012. Any purchaser of a property shall have to deduct 1% of the sale consideration payable to the seller as Income Tax. Agricultural property shall not be covered in this provision. If the sale consideration is less than the circle rate of the property, then the 1% of the circle rate shall be deducted by the purchaser. No deduction is required if the property sale value is less than 50 lacs in Major cities (Metros, Bangalore, Ahmedabad, Hyderabad, Gandhinagar & Secunderabad). In all other cities, the cap is 25 lacs rupees.

7. TDS on Sale of Jewellery / Bullion  – This provision has been introduced to curb the amount of cash being used to buy & sell jewellery / bullion. A seller of jewellery / bullion shall have to deduct tax at the rate of 1% of the sales value if the  sale value is more than Rs. 2 lacs and is in Cash. It doesn’t matter if the buyer is a manufacturer, trader or buying for personal use. This would hit people who buy jewellery in Cash !

8. Penalty Clauses for Tax Evasion – This is a scary provision if an Individual / HUF who has evaded tax would be liable to pay tax on evaded income @ 30% with no deduction / tax allowance.  So for example if a person had income of Rs. 200,000 and he did not pay tax on Rs. 20,000 (amount above Rs. 180,000), he would loose the benefit of tax free slab of Rs. 1,80,000 and shall be taxed at 30% on entire Rs. 200,000. If he would have paid tax earlier, it would have been Rs. 2000, but under the new penalty provision, he would have to pay penalty tax of Rs. 60,000.

9. Filing of Return of Income is now mandatory in India if you are a resident in India and have a property located outside India, irrespective of the fact that he / she has no taxable income. It is more relevant for NRIs returning back to India or are on a temporary assignment in India which makes them resident in India. Powers have also been increased for Income Tax authorities to reopen any case in past 16 years if they believe that income has escaped tax with regards to any asset located outside India. Hence be very careful and file your returns promptly even though you have no taxable income.

10 Security Transaction Tax has been reduced from 0.125% to 0.1%. This will reduce the cost of buying shares in India.

11. Senior Citizen are a bit Younger now – As per the new provisions, a senior citizen can enjoy tax benefits from 60 years of age (earlier 65 years). This is applicable for Medical Insurance premiums (section 80D), Treatment of diseases (Section 80DDB), and TDS provisions. Even senior citizens are not required to pay advance taxes if they do not have income from business / profession.

12 HUFs can be much easier to Form : Till now any income / gifts received by HUF from its member was taxable in the hands of the HUF. However, this budget has exempted any amount or property received by a HUF from its members from tax in the hands of HUF.

13 Deductions for Donations under section 80G now have been limited to Rs. 10,000 if such donations are made in cash. The finance minister wants donations to be made via cheque so that the circulation of black money can be curtailed.

14. Deduction for Life Insurance Policy Premiums under section 80C would now be allowed only if the premium amount is not more than 10% of the actual sum assured. Any premium over 10% of the sum assured would not be allowed as deduction. Earlier this amount was 20% of the actual sum assured. For example, if the sum assured on a policy is Rs. 100,000 and you are paying premium of Rs. 15,000 per year, you would be allowed deduction only upto Rs. 10,000 (10% of sum assured) under section 80C.

15. An additional deduction of Rs. 20,000 for investment into Infrastructure Bonds seems to have been discontinued this year. The current budget has not extended the deduction into the year 2012-13.

16. Lastly, Direct Tax Code has not been introduced and hence all deductions under the act stays for this year as well. This includes Rs. 100,000 deduction under section 80C as well as Rs. 20K deduction for investments into Infrastructure Bonds.

 

Indirect Taxes

As the name suggests, Indirect taxes indirectly tax our incomes. They make the goods and services expensive and hence reducing the net disposable income. The current budget has broadly introduced the following changes :

1. Standard Excise duty has increased from 10% to 12%. Excise duty is paid by manufacturing companies on the products produced by them. Rise in excise duty would mean a 2% increase in the cost of production of the manufacturing companies which in all likelihood would result in increasing the prices of products;

2. Service Tax rates have increased from 10% to 12%. This will make services expensive. A Rs. 110 bill would straight away become Rs. 112. Flight tickets, mobile bills, electricity bills, etc. all would get hiked by 2% due to this incremental tax.

3. Custom duty on import of gold has increased from 2 to 4%. This would increase the price of gold and reduce gold demand. The motive behind this step is to reduce investment into Gold which is an unproductive asset class. Further, large scale gold import was resulting in a current account deficit. Increase in custom duty would reduce the import of gold and help in comforting the ballooning current account deficit of India.

 

Other points

1. Turnover limit for Tax audit requirement under section 44AB  have been increased from Rs. 60 lacs to Rs. 1 crore in case of a person doing business. For professionals, this limit has been increased from 15 lacs to 25 lacs. This would reduce the efforts required by people to comply with the Income Tax Act requirements.

 Is the budget that bad ?

Here is our two cents on the budget. We don’t consider the budget that bad as other people in the street are screaming. Infact, it appears to be the best possible budget which the FM could come up in the current economic crises which India is facing due to global head winds. Did the finance minister have any choice ? Considering the fiscal deficit at 5.1%, any further taxation doles would have certainly pleased the masses, but would have created a havoc on the taxation revenues and have rocked the credit rating of the country.

He had no choice than to increase the taxes inorder to better the fiscal health of the nation. If such steps are not taken promptly, India’s trip to Greece is not far away. Certainly there are some nuances which could have been improved by providing people in all tax slabs a fair share of the tax benefit, but that doesn’t mean that the overall budget was crap !

 

What are your views ?

 

The official budget documents are located at http://indiabudget.nic.in/bill.asp

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19 Responses to Impact of Budget 2012

  1. Vivek K says:

    Thanks for highlighting the positives of the budget. I agree the budget isn’t too bad, may be not many goodies for salaried people but that’s fine. You can’t have makhan malai every year :).

    I think people are frustrated on the government due to corruption, scams etc. and it is all coming out on the budget. They probably see it as when government is eating so much in illegal ways, why ain’t they giving anything to the public?

  2. Sankalp says:

    Kudos to Banyan Financial Advisors for explainig the budget in such a easy manner. No doudbt one should always think from long term perspective.

  3. Puneet Sachdev says:

    Thanks for this good summary. Very useful.

  4. Gaurav Rohela says:

    nice summary – thanks for your efforts!

  5. Hey Vivek,
    I appreciate your comments. There are not many people around who can understand the fix in which our Hon’ble FM is in. On one hand the people want him to reduce the Fiscal Deficit. On another hand they want him to increase tax doles ! You can’t have both right ?

    On a lighter side, FM would have already budgeted for the corruption element in the expenditures. Each of his department would have adjusted the actual expenses by 150% to have their cuts :)

    Regards
    BFA

  6. Anuag says:

    Thanks BFA for providing such a crisp summary of budget which is very helpful for people like me.

    Regards,
    Anurag

  7. Hi Anurag
    I am glad you liked it.

    Regards
    BFA

  8. Lalit says:

    BFA, how do you get such simple words to explain a complex issue like ‘Budget’. Anyways, your explanation really helps a lot to understand and digest the jargon of Budget. However, i just have a question, what is the difference between point no. 15 and 16 in Personal income tax category.

  9. Thanks Lalit.
    Point 15 mentions that the 20K additional deduction for investment into Infrastructure bond seems to have been discontinued.
    Point 16 is commenting upon the validity of 80C tax deduction for the year 2012-13. DTC aims to remove 80C based deductions.

    Not sure if I have answered your query. Please feel free to ask further questions.

    Regards
    BFA

  10. Government is planning to reduce the 3 years lock in period for the Equity investment made under Rajiv Gandhi scheme (in budget 2012) to 1 year.

    http://articles.economictimes.indiatimes.com/2012-03-21/news/31220172_1_lock-in-period-retail-investors-retail-participation

  11. gomathy says:

    sir,
    i am an nri and i do have some rental income,nri/nro and resident accounts in india
    but i am not living or working there..and usually visit india for few months in a year.
    is it still required for me to file taxes in india – will i get any form 16 as such ,
    if i dont have a employer ..who will provide that form 16 to me.

  12. shiva says:

    sir,

    i am a NRI –
    i have a nro account with sbi..and recently i noticed that there wa a credit interest
    of 2500 and then again there is a deduction of 30% out of it…
    i thought banks generally dont deduct any tax for NRI until the total income for a year reaches 2lakhs -which is the exemption that is for NRIs..
    but how can i claim this then. i understand these could be claimed with filing tax returns.but i would like know why is the bank even deducting this at the first place..when my income doesnt reach 2lacs yet.

  13. Gomathy,
    Form 16 is only for Salary income. In most of your rental income you don’t receive any such form. Unless a TDS has been deducted, you won’t receive any certificate from your tenant.

    Ideally you should file returns every year in case your income in India crosses Rs. 2 lac and pay taxes. This is not a very straight forward query and in case you need any further clarification, please feel free to email us at info@banyanfa.com

  14. Hi Shiva,
    Your point is valid if your account was a resident saving account. However for NRO accounts, banks are required to deduct TDS @ 30% plus cess on any amount of interest. For more details on NRI bank accounts, you can refer to our post http://insight.banyanfa.com/types-of-non-resident-bank-accounts-nre-nro-fcnr/

  15. rex says:

    sir,
    need clarification on your reply to Mr.Shiva.
    i thought NRIs has a tax exemption until 2lakhs..so..why is his income from NRO interest getting taxed.. shouldnt he be taxed…only after his income reaches 2 lakhs…kindly clarify

  16. goyal says:

    sir,
    i am an nri..want to remit and park 15 lakhs in my nre account in india.
    like to know..if the interest that i get from this 15 lakhs attracts any tax.

    i understand there is no tax on nre account interest gained ……but is there a limit. will it fall under the exemption of 2lakhs, wherein if my interest earned in a give year exceeds 2lakhs..it will start getting taxed..

    also, can i ask for a monthly payout of interest that i get from this 15 lakhs ..

  17. Rex,
    As I mentioned in my reply to Shiva, the exemption is not available on NRO account. Your interest income will get subject to TDS. However, you can file your tax return annually to claim the refund of TDS if your total income is less than 2 lac.
    I hope that clarifies the point.

  18. Goyal,
    Interest on NRE is not subject to tax in India and hence will not be subject to any TDS irrespective of any amount. However, you should consider the impact in your respective foreign countries where this may be subject to tax. Check out our article http://insight.banyanfa.com/nre-fixed-deposit/ for more details.

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