Budget 2019: All personal finance related changes

In terms of the personal finance space Budget 2019 proposed some major changes which would impact the tax liability and investments of the common (and the rich) taxpayer.

Here are the changes proposed under the Union Budget 2019 in personal finance–

Surcharge rates on Income Tax have been increased

In an effort to collect more taxes from the super rich population of India, the surcharge rates have been increased. For individuals and HUFs, the surcharge rates have increased in higher income slabs depending on their incomes. The new rates of surcharge are as follows –

Income level New Surcharge Rates Effective Income Tax Rate
If income is between INR 50 lakhs and INR 1 crore Surcharge of 10% 34.32%
If income is between INR 1 crore and INR 2 crores Surcharge of 15% 35.88%
If income is between INR 2 crores and INR 5 crores Surcharge of 25% 39%
If income is INR 5 crores and above Surcharge of 37% 42.74%

These surcharges are charged over and above the tax calculated on the taxable income of the individual. The surcharge is calculated on the tax liability (including 4% cess) and then added to the tax payable to arrive at the total tax payable. E.g. for income above Rs 5 Crores, the effective income tax rate is 30% * 1.04 * 1.37 = 42.74%!

Full tax rebate for taxable income up to INR 5 lakhs

The concept of rebate on income up to INR 5 lakhs was introduced in the Interim Budget presented in February 2019 and Mrs. Sitharaman affirmed this policy in the new budget too.

As per the provision, if the taxable income of the taxpayer is up to INR 5 lakhs, then the entire tax payable would be allowed as a rebate under Section 87A. So, the tax liability becomes nil if the taxable income of the taxpayer is up to INR 5 lakhs.

The maximum rebate allowed is up to INR 12,500 which is equal to the tax liability payable on incomes between INR 2.5 lakhs and INR 5 lakhs.

Note: This rebate is not valid on income from capital gains (except STCG in debt funds) even if the total income including capital gains is less than 5 lakhs. The capital gains part will still be taxable.

Introduction of new sections of deduction under Chapter VI A

Chapter VI A of the Income Tax Act lists the various deductions which can be claimed by taxpayers to reduce their taxable income. Under this chapter, the Finance Minister has introduced two new deductions to allow individuals to reduce their taxable income further. These two deductions are as follows –

Deduction under Section 80EEA

Under this section, a taxpayer would be allowed a deduction of up to INR 1.5 lakhs on the interest paid on a home loan availed by him/her. This deduction is allowed over and above the deduction of INR 2 lakhs already available under Section 24. Thus, taxpayers can now claim a total deduction of up to INR 3.5 lakhs on their home loan interest.

There are some conditions which should be fulfilled for availing this deduction. These conditions include the following –

  • The home loan should be taken to buy a house and the loan should be financed by a financial institution
  • The stamp duty value of the house which is being bought should be up to INR 45 lakhs
  • The date of loan sanction should be between 1st April 2019 and 31st March 2020
  • The house being bought should be the first house owned by the taxpayer. In other words, the taxpayer should not be an owner of any other house property apart from the house being bought
  • If the house is located in a metro city, the carpet area should be up to 60 square metres and if the house is in a non-metro area the carpet area should be up to 90 square metres.

By introducing this section, the Government aims at promoting housing facilities among the Indian population.

Deduction under Section 80EEB

Deduction is allowed under this section on the interest paid by a taxpayer on a loan availed to buy an electric vehicle. If the taxpayer buys an electric vehicle and avails of a loan for the same, the interest paid on such a loan would be allowed as a deduction from the taxpayer’s income. The maximum deduction which can be claimed is up to INR 1.5 lakhs. The loan should be financed by a financial institution between 1st April 2019 and 31st March 2023.

This deduction aims to promote the usage of electric vehicles which would not only reduce pollution it would also reduce the demand for non-renewable sources of fuel.

Change in NPS rules

To make National Pension Scheme (NPS) more attractive for investors and also to increase contributions, the rules governing NPS have been changed.

Here are the new changes which have been proposed under the NPS scheme –

  • Government would contribute 14% of the employees’ salary towards the NPS scheme for Central Government employees. The limit has been raised from 10% to 14%.
  • Central Government employees, however, are required to make a contribution of 10% as they were doing earlier.
  • If Central Government employees contribute towards Tier II account of their NPS scheme, the contributions can be claimed as a deduction under Section 80C up to a maximum of INR 1.5 lakhs.
  • The total amount which can be withdrawn as lump sum at the time of maturity (i.e. 60% of the NPS corpus) would now be allowed as a tax-free amount. Earlier, only 40% withdrawals were allowed as a tax-free benefit and the rest 20% were subjected to tax. However, with the new rules, the entire withdrawn amount would be allowed as a tax-free income in the hands of the taxpayer. This would reduce the tax liability of the individual and also allow higher disposable income earned from NPS investments.

Changes in tax rules for house property

There are two major changes which have been proposed in case of income from house properties. These changes are as follows –

  • If the taxpayer has two self-occupied house properties, there would be no deemed rent. As such, no tax would be payable by the individual on the deemed rental income. The earlier rules stated that if the taxpayer had more than one self-occupied house property, there would be a deemed rental income and the same income would be taxed. However, in the new budget, the limit on house properties has been increased from 1 to 2 and if the taxpayer has more than two self-occupied house properties, then deemed rental income would be taxed.

  • Exemptions on capital gains from house property are available under Section 54. If the taxpayer purchased one house property, he could avail exemptions available under Section 54 on the capital gains incurred. However, the new budget has raised the limit to two house properties. Taxpayers can buy up to two house properties in their lifetimes and claim an exemption from the capital gains earned from those house properties. To claim the deduction, however, the capital gains from the sale of the house property should be limited to INR 2 crores.

Gift tax for NRIs

A new provision has been proposed by the budget wherein if any sum of money is paid or a property is transferred by a resident individual to a Non-Resident Individual on or after 5th July, 2019, the money paid or property transferred would be considered as an income earned in India and such an income would be taxed in the hands of the NRI.

Mandatory filing of returns

In the following three instances, as stated under Section 139, an individual would have to compulsorily file his/her income tax returns –

  • If the individual has deposited a total amount exceeding INR 1 crore in one or more current accounts with a bank or a co-operative bank during the financial year
  • If the individual has incurred costs exceeding INR 2 lakhs on himself and on other individuals for travelling to a foreign country
  • If the individual has incurred a total cost exceeding INR 1 lakh on consuming electricity during the financial year.

Interchangeability of PAN card and Aadhar card for tax filing

The budget has made PAN Card and Aadhar card interchangeable for filing income tax returns. Individuals not having a PAN Card can use Aadhar card in the place of PAN Card.

So, these are the latest changes which have been proposed by the Union Budget 2019. All these changes are expected to make India more progressive and are tax friendly for the common population (but not for the super rich though). So, know these changes and understand how they would affect your personal finances in the next financial year.