The Finance Bill 2018 was passed on March 14 and it will become law by April 1 once President Ram Nath Kovind signs off on it. Once it becomes law it will directly have an impact on the taxes you pay.
Some of the key changes include reintroduced standard deduction, tax relief for senior citizens, removal of medical and travel allowances of the salaried class, introduced long-term capital gains (LTCG) tax on equity, and even hike on income tax cess.
Here are 10 tax changes that will come into effect from the new financial year, i.e., 2018 April 1.
No change in income tax slabs for individuals :
Stating that the government had made many positive changes in the personal income-tax rate applicable to individuals in the last three years, Jaitley left the income tax slabs unchanged.
Cess on income tax hiked to 4% :
Cess on income tax will be hiked from 3% to 4% thereby increasing the tax payable by all categories of taxpayers.(For Tax Planning)
Standard deduction reintroduced :
Employees will get a standard deduction of Rs 40,000 from salary income.
Impact: Standard deduction will only benefit pensioners and non-salaried. Since it has been introduced in lieu of transport (Rs 19,200) and medical (Rs 15,000) allowances, the salaried won’t benefit much. For salaried, income exempted from tax after setting off the gain and loss comes to only Rs 5800 and the tax saved on this income would depend on the tax slab of the employee. Since pensioners do not get medical and transport allowances, they will get a deduction of Rs 40,000 from their gross total income.
Medical reimbursement and transport allowance knocked out :
The existing annual transport allowance of Rs 19,200 and Rs 15,000 medical reimbursement, will be taken away as part of the salary structure.
Impact: Again, salaries are at a disadvantage. Besides, as mentioned above the standard deduction introduced to compensate for this move won’t benefit much. Consequently, individuals with income above Rs 5 lakh would end up shelling out more tax after taking into account the standard deduction, the removal of the allowances and increase in cess. While salaried stand to lose from this move, it will have a neutral impact on pensioners.
EPF contribution of new women workers capped at 8% :
Women joining the workforce for the first time will have to contribute only 8% instead of 12% or 10% as the case may be, for the first three years. The move will enhance their take-home pay. Further, for new employees coming under the ambit of EPFO would be provided 12 percent contribution from the government.
Impact: While capping the EPF contribution at 8% means higher take-home salary, it would also impact the Retirement Savings of Women, albeit marginally.
LTCG exceeding Rs 1 lakh to be taxed at 10% :
At the moment, gains from the sale of equity shares or mutual funds held for more than a year were not taxed. The Finance Bill 2018 had proposed to re-introduce LTCG tax on gains arising from the transfer of listed shares and equity mutual funds exceeding Rs 1 lakh at 10 percent, without indexation benefit.
Section 80D limit hiked to Rs 50,000 for senior citizens :
The limit of deduction under section 80D for senior citizens will be hiked from Rs 30,000 to Rs 50,000.
Impact: With medical inflation hovering around 13-15%, the increased exemption and additional critical illness exemption will incentivize senior citizens to get sufficient medical coverage to tackle the growing medical expense burden.
Exemption of interest on deposits hiked for seniors :
Impact: This means that no tax will have to be deducted at source (TDS) on such income. Given that post office schemes and fixed deposits comprise a big chunk of senior citizens’ retirement corpus, this will result in a significant rise in their savings if their income falls in the taxable bracket. It also implies that the senior citizens who do not have taxable income will not have to furnish Form 15H to prevent the deduction of tax at source.
DDT on equity mutual funds :
Equity-oriented mutual funds will now come with a Dividend Distribution Tax (DDT) at 10 percent.
Impact: Investors relying on dividends from equity funds such as balanced funds would have to reconsider their investment strategies. DDT will reduce the in-hand return to the investor if the dividend option is opted for. The dividend, however, remains tax-free in the hands of the investor. The fund houses will have to deduct DDT before declaring a dividend. Hence, the growth option could be more suitable, and to meet regular income needs, the Systematic Withdrawal Plan option may have to be used by investors.
Tax-exemption on NPS corpus for self-employed :
For self-employed people, 40 percent of the total amount payable from a tax upon closure of National Pension System (NPS) will be exempted from tax.
Impact: This tax benefit will now bring self-employed individuals at par with the salaried class.