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Budget blues: A few new taxes, higher cess
Published On , 6 Feb 2018 By TOI
Investors trying to figure out future impact of LTCG tax, dividend tax on SIP funds
In the Union Budget on February 1 this year, finance minister Arun Jaitley had quite a few proposal that directly or indirectly would have an impact on individual investors and tax payers.
The FM proposed to introduce a new tax, a 10% tax on all long term capital gains (LTCG) of more than Rs 1 lakh per annum. This proposal created quite a stir in the market with the sensex losing over 1,200 points or 3.3% in three session. This proposal also led several of the foreign portfolio investors (FPIs) to voice their concerns about their investments in India. Several of the FPI fund managers said that they were trying to figure out the impact of the 10% LTCG tax which may take away some elements of competitiveness from India.
Market players also pointed out that under the LTCG tax structure that would be effective April 1, investors will not get any indexation benefit, a provision that was available when it had existed earlier, prior to October 2004. At that time investors paid 20% tax on LTCG after indexation. The government expects about Rs 20,000 crore to accrue to the exchequer through this tax.
The FM, however, proposed some new rules relating to LTCG tax, called grandfathering, which were aimed at limiting the loss to the market soon after the Budget was announced.
The Budget also proposed that all dividends distributed by SIP mutual funds have to pay a 10% tax. This proposal, market players said, would cut down on the net amount of money that mutual fund houses could distribute to their investors. Some industry players said the incidence of 10% tax on SIP mutual funds will lead to rethink on the parts of some investors as to what type of mutual funds they should invest in.
The Budget also proposed to introduce a standard deduction of Rs 40,000 per annum in lieu of the transport and medical allowances that a salaried individual enjoys. A back of the envelope calculation, however, shows that the maximum a salaried individual could gain is about Rs 2,081 per annum from this standard deduction clause.
There are quite a few new provisions for senior citizens in the Budget proposals. Firstly, the FM said that from next fiscal, all senior citizens would to enjoy deductions of Rs 50,000 from interest income, up from Rs 10,000 now.
Buying health insurance for senior citizens is a tough and costly proposition. The FM has proposed to enhance the tax free health insurance premium and medical expenses to Rs 50,000 per annum, from Rs 30,000 earlier. The FM also allowed senior citizens deductions worth Rs 1 lakh per annum for treatment of specified diseases, up from Rs 60,000 earlier.
The FM, however, introduced an enhanced cess on income tax payers, to 4% to support health and education in the country. Earlier there was a 3% cess for higher education and primary education. Due to this, individuals with incomes in excess of Rs 1 crore will have to pay an effective tax rate of 35.8% from 35.5% now.
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