Union Budget 2018: 7 Key Highlights of Personal Income Tax

The budget every year brings important considerations that impact individuals across the country. There are several deductions available in the Budget, which often allow individuals to save a lot more on their taxes as well as invest for their future. Here we bring you key highlights of the 2018 Budget and how it impacts your Income Tax.

The standard deduction for the salaried group: -

A standard deduction is a deduction allowed in income tax irrespective of the expense incurred or the investment made by the individual. No disclosures are required for this type of Income Tax Standard Deduction as it is allowed at a standard rate.

The standard deduction in Budget 2018 has been introduced for a salary of Rs. 40,000 or above and is applicable from 1st April 2018. This deduction is allowed irrespective of the actual expense incurred by the employee. The employee is not required to submit any bills or proof to the employer for claiming the deduction. This deduction has been introduced instead of Transport Allowance & Medical Reimbursement which was earlier allowed to employees against bills as proof for claiming these benefits.

Thus, the standard deduction of Rs. 40,000 replaces medical allowance of Rs. 15,000 and transport allowance of Rs. 1600 per month, i.e. 19,200 per annum, in turn allowing for an additional benefit of Rs. 5,800.

Example: -

Relief for Senior Citizens: -

The 2018 Budget also considers the considerations of Senior Citizens with the following provisions.

Exemption of interest income on deposits with banks and post offices to be increased from Rs. 10,000 to Rs. 50,000 and TDS (Tax Deducted at Source) will not be required to be deducted on such income, under section 194A. The benefit of exemption will also be available for on interest from all fixed deposits schemes and recurring deposit schemes.

The government has raised the limit of deduction for health insurance premium or medical expenditure from Rs. 30,000 to Rs. 50,000 under Section 80D . All senior citizens will now be able to claim the Rs. 50,000 per annum in respect of any health insurance premium or any general medical expenditure incurred.

The limit of deduction for medical expenditure in respect of certain critical illness has been raised from Rs. 60,000 in case of senior citizens and from Rs. 80,000 in case of very senior citizens, to Rs. 1 lakh in respect of all senior citizens, under section 80DDB . The government also envisions to continue Pradhan Mantri Vaya Vandana Yojana up to March 2020, while proposing to increase the current investment to Rs. 15 lakhs from the existing limit of Rs. 7.5 lakh per senior citizen.

Increased education cess from 3% to 4%: -

Furthermore, the cess has been increased by 1%, in the name of Health Cess, making it effectively 4% 'Health and Education Cess'. As of now, an education cess of 3% was levied on personal income tax. While this move may help the government in meeting the healthcare and education needs of the rural families, it is certain that the tax liability of both individuals and corporates will increase.

Long Term Capital Gain on Equity and Equity Oriented Fund: -

The new tax will be levied on redemption of equity mutual fund units or sale of shares after April 1, 2018, provided they have been held for more than one year. The long-term capital gains exceeding Rs. 1 lakh arising from the redemption of mutual fund units or equities on or after April 1, 2018, will be taxed at 10%, without any indexation benefit. However, the gains up to 31st January 2018 will not attract the said tax to the extent of the fair market value as on 31 January 2018.

According to the income tax department, the cost of acquisition for the long-term capital asset acquired on or before 31st of January 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such an asset as on 31st of January 2018, the fair market value will be considered to be the cost of acquisition.

Further, if the full value of consideration on sale is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be considered to be the cost of acquisition.

Scenario 1: -

Purchase price on January 1, 2017 is Rs. 100

Price on January 31, 2018 is Rs. 200

Sold on March 31, 2018 at Rs. 250

Since it is sold on or before March 31, 2018, there is no tax liability.

Scenario - 2

Purchase price on January 1, 2017, is Rs. 100

Price on January 31, 2018 is Rs. 200

Sold on April 1, 2018, at Rs. 250

As the investment is sold after March 31, it will attract long-term capital gains. Since the actual cost of acquisition is less than the fair market value as on 31st of January 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition, and the long-term capital gain will be Rs. 50 (Rs. 250 - Rs. 200).

Scenario- 3

Purchase price as on January 1, 2017, is Rs. 100

Fair market value is Rs. 200 on 1st of January 2018

Sold on 1st of April 2018 at Rs. 150

Here, the actual cost of acquisition is less than the fair market value as on 31st of January 2018. The sale value is also less than the fair market value as on 31st of January 2018. So, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 - Rs. 150).

Scenario- 4

Purchase price on 1st of January 2017 is Rs. 100

Fair market value is Rs. 50 on 31st of January 2018

Sold on 1st of April 2018 at Rs. 150

In this case, the fair market value as on 31st of January 2018 is less than the actual cost of acquisition. So, the actual cost of Rs. 100 will be taken as the actual cost of acquisition, and the long-term capital gain will be Rs. 50 (Rs. 150 - Rs. 100).

Scenario- 5

Purchase price on 1st of January 2017 at Rs. 100

The fair market value on 31st of January 2018 is Rs. 200

Sold on 1st of April 2018 at Rs. 50

The actual cost of acquisition is less than the fair market value as on 31st January 2018. The sale value is less than the fair market value as on 31st of January 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 - Rs. 100) in this case.

Reduction of the corporate tax rate from 30% to 25%: -

This has been a relief for Micro, Small & Medium Enterprises (MSME's) as the government had declared to decrease corporate tax rate to 25% in the Union Budget of 2017.

Deductions not to be allowed unless the return is filed by the due date: -

The benefit of deduction under the entire class of deductions under the heading "C.—Deductions in respect of certain incomes" in Chapter VIA shall not be allowed unless the due date files the return of income .

Employee Provident Fund: -

For new EPF accounts, women's' contribution has been reduced to 8% with no change in employer's contribution for the first three years of their employment.

The Government would contribute 12% of the wages for new employees for the next three years in all the sectors.