Here’s what Budget 2007 proposes for the Aam Aadmi in India.

Insignificant increase in threshold limits

The Budget has proposed to increase the threshold income limit by Rs 10,000 for all categories of individuals. This will result in a nominal increase in tax benefit of around Rs 1,000 for most individuals with the senior citizens being benefited by around Rs 2,000.

Additional Cess on Income Tax introduced

The FM has happily increased the threshold income limit. And, as a back slap, he has introduced an additional cess termed as 'Secondary and Higher Education Cess on Income Tax' at the rate of 1 per cent over the existing Education Cess of 2 per cent.

This may remove the joy of the increase in threshold limit as the increase in this additional education cess will have an impact for individuals having income above Rs 510,000.

Limits for medical insurance premium deductions increased

Tax deduction limits for medical insurance premium under Section 80D have been increased by Rs 5,000. This will result in medical insurance premium upto Rs 15,000 (Rs 20,000 for senior citizens), now being eligible for tax deductions. This will help individuals obtain higher coverage without compromising on the tax deductions.

Credit card/ electronic mode of payments for insurance premium payment is proposed to be allowed, increasing the convenience for the policy holders.

Interest on loans for higher education of a ‘relative’ eligible for deduction

With growing requirement for higher education among students and increasing education costs, there is an increasing demand for loan funding. Till now, the tax deduction for such borrowings was available for those availing higher education.

The Budget proposes to extend the benefit under Section 80E to borrowers of loans funding higher education of their relatives, ie, spouse and children.

Increase in Dividend Distribution Tax (DDT) for domestic companies

The Budget proposes to increase DDT from the present rate of 12.5% to 15% (exclusive of surcharge and education cess). This will mean lower returns on investments for shareholders.

Increase in DDT for Money Market MF or Liquid Funds 

The budget has introduced DDT on Money Market MF or Liquid Funds at 25% (exclusive of surcharge and education cess). This may result in lower payout from the MFs to the investors.

ESOPs: an expensive incentive

ESOPs (Employee Stock Option Plans) which is used by companies as an incentive tool to retain employee talent, is now a less attractive proposition. With the FBT net being widened to capture more employee benefits, the FM in his speech has proposed to bring ESOPs under the FBT ambit. The benefit is now taxable to the employer when the options are exercised by the employee at the fair market value (less recovery from the employee).

The Central Government guidelines on Stock Option Plans compliance for tax benefit may now be redundant. This may also impact corporates on their existing ESOPs which were granted earlier to employees but would be exercised after April 1, 2007.

More cash withdrawal without tax

The Banking Cash Transaction Tax (BCTT) was introduced by the FM in his 2006 Budget and applicable for cash withdrawals by individuals over and above Rs 25,000. The FM has proposed to increase the withdrawal limit for individuals to Rs 50,000.

Limit on investment in the capital gains bonds issued by NHAI and REC

The FM had, by a notification in December 2006, restricted the limit of investment in bonds of NHAI and REC, eligible for capital gains tax exemption under Section 54EC, to Rs 50 lakh per investor per year with retrospective effect from April 1, 2006. The limit will be continued.

Securities Transaction Tax (STT) and Capital Gains Tax are untouched.

PAN is the sole identification number for security market participants

The Permanent Account Number will be a sole identification number for all participants in securities market with an alphanumeric prefix or suffix to distinguish a particular kind of account.

Higher tax deduction on fees for professional/ technical services

The FM has proposed to increase the TDS rate under Section 194J from 5 per cent to a higher rate of 10 per cent to be effective from June 1, 2007.

The author, Yuvak Mangaonkar, is Deputy Manager, PricewaterhouseCoopers Pvt Ltd.