How Union Budget 2016 affects the salaried class

Naveen KukrejaPaisaBazaarFinance Minister Arun Jaitley’s third Union Budget focused on continuing the present course of fiscal consolidation as well as bring about equity to tax system. While previous budget had a lot to offer to the middle class, this year’s budget was more inclined towards low-income households. Government’s proposal to increase tax rebate, waive off service tax on homes and increase deductions on rent paid etc. are clearly meant to benefit economically weaker segment of our society. However, the biggest jolt to salaried section was the tax levied on the interest earned on EPF; this will mainly hit the middle class and people with comparatively higher salaries. Let’s look at some of the important implications of this year’s budget on salaried class: Tax parity for EPF and NPS: Government proposed to partially tax EPF withdrawals with an intention to bring parity across retirement plans. However, this announcement set many heads rolling. There was a lot of noise regarding the changes in its tax treatment and what it meant for salaried class, to an extent that the government later had to clarify that only 60% of the interest earned on contributions made after 1st April will be taxed at the time of withdrawal. The principal amount will remain tax-free. This move is expected to affect nearly 20% of India’s salaried class and those with statutory wage limit of Rs.15000 per month or lesser, will not be affected by this new proposal. Meanwhile, PPF will continue to be in the EEE tax regime, meaning that its principal, interest earned and the maturity value would remain tax free. The motive behind exempting 40% of the NPS corpus is to increase its attractiveness vis-à-vis other retirement products, specially the EPF. At present, the NPS corpus withdrawn after retirement is fully taxable, putting it at a sharp disadvantage over other products. Extension of time period for availing Rs.2 lakh deduction: Earlier, a borrower had to complete the possession/construction of the property within three years of taking the home loan, failing which the borrower could only claim a deduction of just Rs.30000. As most of the developers failed to deliver the project within the three years’ time period, borrowers were deprived from claiming the entire Rs.2 lakh limit under Section 24(b). The decision to increase the time period from 3 years to 5 years is a good move as it will allow more people to avail the entire deductions. However, the government should have spared the borrower for cases where the delay in possession is caused at the developer’s end.Increase in tax rebate for individuals with net income less than Rs.5 lakh: The biggest gift for small tax payers in this years’ budget is the proposal to increase the tax rebate for individuals with net income of Rs.5 lakh or less. At present, the tax rebate for such individuals under Section 87A is Rs.2000, which has been increased to Rs.5000 in this year’s budget. Thus, if your taxable income is Rs.5 lakh in the next financial year, you will additionally save Rs.3090 in taxes. This is a welcome move as the proposal is expected to benefit more than 2 crore tax payers. Additional deduction of Rs.50000 for interest paid on home loans lower than Rs.35 lakh: Another welcome move in this year’s budget is the introduction of an additional deduction of Rs.50000 for interest paid on home loans, over and above the existing Rs.2 lakh deduction available under Section 24b. However, this additional deduction can only be claimed by first time home buyers availing home loans of Rs.35 lakh or less and for homes valuing Rs.50 lakh or less. This move will encourage people to buy homes and infuse much-needed demand in the housing sector. This deduction may not benefit people residing in metro cities, given that most of the housing stock in these cities can be priced over Rs.35 lakhs.In addition to this, the governed has also waived off service tax on purchasing homes less than 60 square feet. This step can act as a stimulus for increasing the construction activityin the affordable housing segment. Tax deduction on house rent paid increased: The proposal to increase the tax deduction allowed on house rent paid from Rs.24000 to Rs.60000 gives the self-employed classes a reason to cheer. This deduction can also be availed by employees who do not receive HRA as part of their salary component. Well, this budget did try to ease the financial pressure over lower middle class and economically weaker section of society. However, I do feel a lot more could have been done for far greater impact. For instance, the government should have removed 50% cap on equity investments in NPS, in the interest of those with higher risk appetite. Also, it would have made a lot sense to include pension schemes from mutual funds and insurance companies under Section 80CCD (1B). As they say, you cannot make everyone happy. But this budget managed to uplift the mood of lower income households and this, according to me, will go a long way as far as development of rural India is concerned.