1. What is the meaning of exempt? What is a “deduction”?
Anything which is not chargeable to tax is called “exempt”. So, if you earn Rs. 10,000 and the govt decides not to charge tax on it, the income is said to be exempt. On the other hand, a “deduction” is the amount on which tax is not payable. Say, you are earning Rs. 10,000 and the govt allows you a deduction of Rs. 3,000, it will mean that you have to pay tax only on Rs. 7,000.
2. What is House Rent Allowance?
House Rent Allowance (HRA) is a sum paid to an employee to cover, fully or partially, the expense borne by him on account of rent of the house he is living in. So, if you are living in a rented accommodation (rent being Rs. 3,000) and your employer pays you (in addition to salary, bonus etc), Rs. 2,500 to cover your rent expenses, the amount of Rs. 2,500 is called HRA.
3. What is surcharge?
Surcharge is the additional tax you have to pay, if your income exceeds a specified amount. E.g. Let’s assume that the laws of a country require a person earning more than Rs. 1 crore to pay a surcharge at 5%. So, if your income exceeds Rs. 1 crore, you have to pay surcharge of 5% of tax. So, if your tax liability is Rs. 50,00,000, then you have to pay a surcharge of Rs. 2,50,000. So, your total tax liability turns out to be Rs. 52,50,000.
4. What is presumptive tax?
In case of business units and service providers, all the accounts have to be maintained and audit has to be carried out. This creates a lot of hassles. So, if their turnover is not more than a specified amount, they can simply pay tax based on a presumption and they will not be required to maintain accounts or get audited. In normal circumstances, business units and service providers pay tax according to their actual profits. But in presumptive scheme, their profits are presumed (say, it is presumed that 10% of turnover is their profit) and they are liable to pay tax on the presumed profits.
5. What is MAT?
Minimum Alternate Tax (MAT) is the tax a company has to pay in any circumstances. It is calculated by using a fixed procedure and formula. So, this is the minimum tax liability of a company. E.g. using normal tax laws, a company is required to pay Rs. 1,000 as tax and its MAT is Rs. 800, so the company will have to pay Rs. 1,000 as tax. However, if tax liability as per normal tax laws is Rs. 1,500 and its MAT is Rs. 2,000, it will be required to pay Rs. 2,000 as tax. So, MAT is the minimum tax a company has to pay under any circumstances.
6. What are capital gains?
When we sell some specified assets (called “capital assets”), gains on them are calculated using a fixed formula. The computed gains are called “capital gains” and tax has to be paid on them.
Highlights of the Union Budget 2016 for Personal Finance and Start-Ups –
- The amount withdrawn from National Pension Scheme at the time of retirement is made 40% exempt.
- The amount withdrawn from Provident Fund at the time of retirement is made 60% taxable, unless invested in annuities. The taxability will apply in case of amount deposited after 1st April 2016, not on the amount deposited before the mentioned date.
- When an employee doesn’t receive HRA from his employer, he will get a deduction of Rs. 5,000 per month. The deduction was earlier Rs. 2,000.
- If a person’s income does not exceed Rs. 5,00,000, he will get a rebate of Rs. 5,000. Earlier, this rebate was Rs. 2,000.
- Individuals earning over 1 crore in the year, will have to pay a surcharge at 15%. Earlier, it was payable at 12%.
- Employer’s contribution over Rs. 1.5 lakh in Provident Fund is now taxable in the hands of the employee. Earlier, the limit was 12% of the salary.
- Individuals have to pay 10% additional tax on dividend exceeding Rs. 10 lakhs.
- Companies with turnover not exceeding Rs. 5 crores, will have to pay tax at 29%, instead of 30%.
- Manufacturing companies established after 1st March 2016 will have to pay tax at 25%. However, they cannot avail any other exemptions and benefits.
- Tax penalties are now fixed and not left at the discretion of the tax officers.
- Small businesses with gross income up to Rs. 2 crores can now use the presumptive taxation scheme. Earlier the limit was Rs. 1 crore. 8% of the turnover will be deemed to be profits. Businesses following this scheme have to pay advance tax by 15th March, as against the earlier practice of paying it in 3 or 4 instalments over the course of the year.
- Presumptive tax scheme is also available to professionals having gross income up to Rs. 50 lakh. Deemed profits will be 50% of the turnover. Earlier, this scheme was not available for professionals.
- Professionals having gross turnover up to Rs. 50 lakh need not get their accounts audited. The earlier limit was Rs. 25 lakh.
- Procedure of payment of advance tax has been changed. The new procedure will require individuals paying more tax in more number of instalments.
- If the house is constructed or purchased within 5 years from the end of the financial year in which loan was taken, a maximum deduction of Rs. 2,00,000 for the interest paid on such loan is allowed, subject to other conditions. Earlier, the time period was restricted to 3 years.
- If the value of the first house is up to Rs. 50 lakh and loan taken is up to Rs. 35 lakh, an additional one-time deduction of maximum Rs. 50,000 is allowed for the interest paid on such loan.
- Deductions available for expenditure carried out on research are now decreased.
- Rs. 500 crores are allocated to “Stand Up India”, a scheme meant to promote entrepreneurship among ST/SC and women entrepreneurs.
- The govt will set up a fund to raise Rs. 2,500 crores every year for the next 4 years to finance promising start-ups.
- Registration process of a company will be simplified and be completed in a day.
- Profits of 3 years out of the first 5 years of start-ups will be exempt. However, MAT will be applicable in those cases.
- In case of start-ups, long-term capital gains will not be taxable if invested in notified funds.
- Earlier, the amount withdrawn in lump-sum from National Pension Scheme was 100% taxable. Providing an exemption of 40% has made NPS at par with PF. So, employees will have more choices now.
- Earlier, the entire amount withdrawn from PF was exempt. This is a very controversial change which has generated huge criticism. I think the govt will take a step back and will make the principal-portion exempt. Charging 60% tax on the interest portion is not completely unfair. It must be noted that this new provision is not applicable for employees earning up to Rs. 15,000 per month. So, in case of such employees, 100% exemption remains.
- The increased deduction in case of non-availability of HRA is a good step but not in tune with the rising cost of living. I find it difficult to imagine a rent of Rs. 5,000 per month for a place where a family can live.
- So, if you are earning up to Rs. 5 lakh, you need not pay taxes of Rs. 5,000. If your earlier tax liability was Rs. 20,000, you need to pay only Rs. 15,000 now. The increased rebate is a good step that will benefit 2.85 crores taxpayers, 82% of the total. The govt will suffer a loss of Rs. 7,500 crores due to this change.
- The increased surcharge will result in maximum tax rate applicable in case of individuals to be more than that in case of companies. The govt must fix an upper-limit of taxation in case of individuals as well.
- The change in limit of employer’s contribution in PF will result in double-taxation.
- Additional tax on dividend income will affect the super-rich marginally and make taxation more complicated.
- Last year, the Finance Minister proposed to decrease the tax rate gradually in case of companies from 30% to 25% and disallowing various exemptions and deductions over the next 5 years, thus earning almost the same tax-revenue and simplifying taxation at the same time. The move to reduce tax rates to 25% in case of new companies is a step in the same direction. Decreasing the deduction in case of research is also a complementary step.
- Earlier, the tax penalties were defined in a range (for example, 100% to 300% of tax evaded). The tax officers had complete discretion to fix any penalty within the range. This resulted in massive corruption and litigation. Now, the quantum of penalties is fixed (say, 150% of tax evaded). This will eliminate discretionary powers and hence reduce corruption and litigation. However, in case of genuine mistakes, tax officers had the power to remove or reduce penalties. In the new system, even the genuine mistakes will be liable to penalty, thus increasing hassles and litigation.
- At present, 33 lakh businesses avail the benefits of presumptive tax scheme. Increasing its ambit will help a lot of businesses and simplify taxation and reduce hassles. Payment of advance tax in one instalment is also a good step in simplification.
- Opening up the presumptive tax scheme for professionals is a great step, but the deemed amount of profits is too high. Very few professionals have a 50% profit margin. Such high taxes will prevent people from joining the scheme. Govt should reduce the margin so that more people can avail the benefits. Increasing the limit of audit is also a good step.
- Earlier, individuals had to pay advance tax in 3 instalments. Now, the same has to be paid in 4 instalments, and more amount has to be deposited in every instalment than before. This will improve govt’s liquidity and circulation of funds but will create problems for taxpayers.
- As the real-estate sector is reeling at the moment, delivery of homes was delayed beyond 3 years in many cases, which resulted in the buyer getting an immensely reduced deduction of Rs. 30,000. To address this, the limit is increased to 5 years. If the delivery is taken within the period of 5 years and other conditions are fulfilled, the maximum deduction available for interest is Rs. 2,00,000. This measure will improve the situation of buyers.
- The additional deduction of Rs. 50,000 is a good step but will hardly help people living in metro cities as value of homes in such cities is generally more than Rs. 50 lakh. This provision will primarily help the people living in Tier-2 and Tier-3 cities. It must be noted that this deduction in available in case of first house only and is only a one-time deduction.
- The govt must understand that entrepreneurship is all about a brilliant idea and team of dedicated people. It has nothing to do with the caste or gender of entrepreneurs.
- The fund of Rs. 10,000 crores to finance start-ups is a good step. However, no clarification is made regarding who can avail the benefit and how.
- All the steps taken for start-ups in the budget were already announced in the “Start Up India” event a month ago by the Prime Minister. So, there is nothing unexpected in the budget.
- Hardly any start-ups make profits in their first 5 years. So, the step exempting 3 years’ profit does not make any sense. Govt must focus more on entrepreneurship. 72% of the founders of start-ups are less than 35 years of age. If promoted, they can generate massive employment and income in the country.
We hope you liked this article. If you have any questions, please do ask via comments. We will be very happy to get back to you with all the answers. Our next article, which is also the last of the series, will focus on steps taken for rural development, agriculture and irrigation. Happy learning!