How Budget affects your tax & investments

What they say about swimming costumes is true about the Budget too. What it reveals is important, what it doesn't is vital.

It's not like me to play Nostradamus, but no mention of EET (exempt-exempt-tax) doesn't mean that it has disappeared. My guess is that the government will bring it in this year -- during the year. Those measures that aren't introduced in the Budget can always be slipped in outside of it. More convenient, since the budgetary debates and the resulting uproars in Parliament can be silently sidestepped.

Here is a brief review of the various Budget provisions, in their order of merit or demerit, as they impact individual taxpayers.

Tax Rates & Thresholds

There is no change in the income tax rates for all the types of assessees. Unfortunately, Education Cess has been increased from 2% to 3%.

The thresholds for an individual or HUF, a non-senior woman and a senior citizen, under which no tax is payable have been increased by Rs 10,000. The new thresholds are Rs 110,000, Rs 145,000 and Rs 195,000, respectively.

This is a rob Peter to pay Paul exercise. Something is given by way of raising the threshold and something is taken by way of increasing the education cess.

You will find that the tax liability of a non-senior male having a total income of Rs 510,000 work out at Rs 105,060 under the old as well as new structures. In other words, those who earn more than Rs 510,000 lose and those who earn less than that would benefit.

The break-even income for non-senior females works out at Rs 521,667 and for senior citizens it is Rs 893,333.

Sec. 10(15vii): New Tax-free Bonds

Interest on notified bonds issued by a State Pooled Finance Entity for raising funds for a group of urban local bodies shall be exempt w.e.f. fiscal year 07-08.

New Sec. 49 (2AB): Fringe Benefit Tax & ESOP

The value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company will be considered as a perk, w.e.f. FY 07-08.

Consequently, the cost of acquisition of such security or shares shall be the value as determined u/s 115WC(1ba) for FBT. The fair market value of the specified security or sweat equity shares on the date of exercise of the option by the employee as reduced by the amount actually paid by, or recovered from the employee in respect of such security or shares, shall be the value of fringe benefit.

The authorities have taken a step back and taxed ESOP at two stages, as was the case earlier. The only difference is that the first stage tax is not in the hands of the employee as perquisite but in the hands of the employer as fringe benefit. Bad! This is injustice.

The second stage tax remains intact.

Sec. 54EC: Capital Gains Bonds

The limit on investment made in any bond redeemable after three years issued by NHAI and REC will be limited to Rs 50 lakh (Rs 5 million) during any financial year, w.e.f. FY 07-08.

Those who have earned higher capital gains on or after 2nd October of any year can contribute Rs 50 lakh to these Bonds during the current FY and another Rs 50 lakh during the next FY, but within 6 months and claim exemption up to Rs 1 crore (Rs 10 million)! Lucky!

Sec. 80D: Mediclaim Deduction Enhanced

At present a deduction up to Rs 10,000 paid out of income chargeable to tax is allowed in respect of medical insurance premiums paid on the health of assessee himself, his spouse, dependent children or parents. Where an individual has insured a senior citizen who may be himself or his spouse or dependent parents, a higher ceiling of Rs 15,000 is available. Same is the case when an HUF insures any of its members who is a senior citizen.

The maximum amounts allowable have been enhanced to Rs 15,000 and Rs 20,000, respectively, w.e.f. FY 07-08.

Sec. 115-O: Dividend Distribution Tax (DDT) on Equities

The dividend declared, distributed or paid by a domestic company is charged to DDT @12.5%. This rate has been increased to 15%. The 10% surcharge and the 3% increased education cess, takes the effective rate from 14.025% to 16.995% w.e.f. FY 07-08.

Sec. 115-R: Dividend Distribution Tax on Units

Any dividend distributed by a mutual fund to its unit holders is charged to DDT @12.5% for an individual or HUF, and @20% for any other person. Henceforth, the income distribution by a Money Market Mutual Fund or a Liquid Fund shall be charged DDT @25% for all categories of taxpayers, w.e.f. FY 07-08.

The effective rate gets stepped up to 28.325% from 14.025%( for individuals) and 22.44% (for corporates). For other types of schemes the existing base rate of 12.5% for individuals and 20% for corporates shall remain unchanged.

Excerpt from the book

Taxpayer to Taxsaver (F.Y.  2007-08)

By A N Shanbhag

Publisher: Vision Books

Price: Rs 235

A N Shanbhag is a best-selling author and a very widely syndicated columnist on personal finance and taxation.

(C) All rights reserved

ALSO SEE:

• Budget 2007-08: Complete Coverage
• All these incomes are tax-free for FY 2007-08