Year 2018 in review: LTCG, changes in direct taxes and a late NPS bonanza

While there certainly appears an intent on part of the Government to end the year on a high note for the common man, it may be a good idea to walk down the timeline to revisit the major amendments that were witnessed in direct taxes in 2018.

One significant change was the decision to impose a 10% tax on long-term capital gains (exceeding Rs 1 lakh) on the sale of listed shares and equity-oriented funds, which were hitherto, completely exempt. The investors in the capital market do not get any benefit of indexation (which is generally available to determine the cost of acquisition). However, sufficient grandfathering provisions find a place in the law to shield acquisitions made prior to February 1, 2018.

To illustrate, if an investor acquired shares prior to February 1, 2018, for a sum of Rs 1 lakh and these shares are sold at Rs 5 lakh in December 2018, the investor can substitute the higher of either the actual cost or the actual consideration (subject to such consideration being less than the market value of the shares) as cost of acquisition in calculating capital gains.

In effect, this would mean that the existing holdings of an investor can still be tax-free. However, acquisitions on or after February 1, 2018, would be impacted by the amendment. In any case, small investors, whose gains in a year do not exceed Rs 1 lakh, will not be affected. Further, with the tax-free investment avenue of parking funds in specified infrastructure bonds to save capital gains now being restricted to only sale of land and/or building, these long-term capital gains would now add more revenue to the exchequer.

If the small investors who were motivated to participate in primary and secondary markets owing to the tax advantage that it gave, find this change as a deterrent, the salaried class left hoping for a major overhaul. Surely, the 2018 budget did confer an ad hoc deduction of Rs 40,000 on the salaried class. But, the benefit that was earlier available on medical reimbursement and transport allowance was taken away.

Essentially, most salaried employees would only receive a benefit of Rs 5,800 reduction in taxable income that results in a tax savings of a minimum Rs 290 and a maximum Rs 1,740, depending on the tax bracket of the employee. Major relief to salaried class, however, came about by an amendment made in the Gratuity law to increase the maximum amount of gratuity to Rs 20,00,000 to bring it on par with Central Government employees.

Pension class, essentially comprising senior citizens had some takeaways from the 2018 Budget. The standard deduction of Rs 40,000 meant that a pensioner who is at the highest tax bracket of 30% would save Rs 12,000 of taxes. Additionally, senior citizens were also made eligible receive tax free interest income of up to Rs 50,000 from deposits made in banks and post office, and the deduction available on medical insurance premia paid for the health of senior citizens was topped up by a further amount of Rs 20,000.

Another amendment that came about was restricting certain deductions under the Income Tax Act under Chapter VI A as being eligible only if the return of income is filed on or before the due date. However, such restriction will not apply to deductions that are predominantly claimed by individuals like deductions with respect to insurance premium, housing loan principal etc. Needless to say, fee for delayed filing of return of income would be levied in all cases where return of income is filed beyond the due date.

Share of direct tax to total Gross Domestic Product (GDP)

Even though the share of direct taxes to the total GDP is little less than 6%, its significance cannot be unnoticed for the fact that it impacts most households. In the same breath that one looks at how the year has been, one also hopes for the future to hold better things.

While one can't anticipate many changes in the interim budget in the wake of upcoming parliamentary elections, few things that the common man would wish for, whether by amendment in the existing law or in the proposed new Direct Taxes Code are rationalisation of the slab rates and a complete relook at the scheme of taxing salaried class in an attempt to simplify as also to supplement the disposable income in their hands. As Martin Luther King once said “Everything that is done in the world is done only by hope” and one can always hope that the wish translates into law.

(The writers are Partner and Principal Associate from law firm Lakshmikumaran & Sridharan)