TomorrowMakers

While Budget 2016 did not contain major changes to tax provisions, there are a few provisions that will impact the finances of the salaried class.

Budget-2016

The annual budget is widely followed by salaried individuals because the changes in tax slabs and other tax provisions will determine the extent of changes to their CTC and, consequently, their take home salary. While Budget 2016 did not contain major changes to tax provisions, there are a few provisions that will impact the finances of the salaried class.

Tax Slabs

The Finance Minister chose to retain the tax slabs as applicable for FY 2015-16 for the next financial year as well. Currently, an individual aged below 60 years pays tax as per the slabs given below.

Taxable Income Tax
Up to Rs. 2.5 lakhs Nil
Above Rs. 2.5 lakhs to Rs. 5 lakhs 10% of income exceeding Rs. 2.5 lakhs
Above Rs. 5 lakhs to Rs. 10 lakhs Rs. 25,000 20% of income exceeding Rs. 5 lakhs
Above Rs. 10 lakhs Rs. 1,25,000 30% of income exceeding Rs. 10 lakhs

So, you shall continue to pay tax as per applicable slabs for the coming financial year as well.

Impact on CTC—Neutral

Home Rent Deduction

Until now, tax payers were allowed to claim house rent of up to Rs. 24,000 as a deduction u/s 80GG from their gross income. This means an individual paying Rs. 2000 per month towards house rent could deduct this amount from his or her taxable income.

This limit has been increased to Rs. 60,000 per year. However, this increase in deduction can be claimed provided the following conditions are fulfilled

  • The tax payer, his/her spouse or minor child does not own a house at the place of employment.
  • The tax payer does not have a self-occupied premise elsewhere. This means the tax payer can own a house in some other city but should not reside in such premises.
  • The tax payer does not receive house rent allowance from his or her employer

The additional deduction of Rs. 36,000 will translate into approximate tax saving of Rs. 3800 for those earning Rs. 5 lacs. Those earning Rs. 10 lacs and Rs. 20 lacs will save around Rs. 7400 and Rs. 11120 respectively.  

Impact on CTC—Positive

Tax Rebate

Currently, those earning up to Rs. 5 lakhs can claim a tax rebate of Rs. 2000 on their final tax liability. So, an individual earning less than Rs. 5 lakhs with a tax liability of Rs. 5000 will need to pay just Rs. 3000 after claiming the rebate u/s 87A.

This rebate has been increased to Rs. 5000. So, for the financial year 2016-17, the individual in the above-mentioned example will pay zero tax.

Impact on CTC—Positive

First-time Home Buyers

Current.ly, home owners can claim deduction of up to Rs. 1.5 lakhs u/s 80C on the home loan principal repayment, stamp duty, and registration fee paid towards the home. Interest payments are deductible up to a maximum limit for Rs. 2 lakhs for self occupied properties.

Budget 2016 has provided for an additional deduction of Rs. 50,000 per annum for first-time home buyers obtaining a home loan of not more than Rs. 35 lakhs for buying a home worth not more than Rs. 50 lakhs. The home loan must be sanctioned between 1st April 2016 and 31st March 2017.

For such first time home buyers, the total interest deductible will be Rs. 2.5 lakhs as opposed to the earlier limit of Rs. 2 lakhs.

Impact on CTC—Positive

High-Income Earners

Those earning an annual income in excess of Rs. 1 crore will have to pay more tax as the surcharge amount over and above the applicable tax slabs has been hiked from 12% to 15%.

Impact on CTC—Negative

Unskilled/Semi-skilled Workers

The government has allocated Rs. 1000 crores towards PF contributions of eligible individuals. The government will contribute 8.33% of the annual basic income of individuals joining the organized sector towards the Employees’ Pension Scheme subject to the following conditions:

  • The individual joins after 1st April 2016.
  • The employee does not earn more than Rs. 15,000 per month.
  • The contribution will be made for a period of three years.

PF contributions in the organized sector consist of two components—employers’ contributions and employees’ contributions.

Employees are required to contribute 12% of their basic pay towards their PF accounts. Employers must contribute 8.33% towards Pension and 3.67% towards Provident Fund. Normally, employers deduct their contribution from the employees, which means the entire PF contribution is made wholly by the employee.

Now that the government shall contribute 8.33%, this will result in a lower cut in the take home salary of those joining the organized sector.

Impact on CTC—Positive

Despite speculation that the minimum tax slab may be raised to Rs. 3 lakhs, the budget saw no tinkering—good or bad—to the tax rates. The increase in tax rebate and house rent deduction is a big plus that will result in tax savings for the salaried class. High-income earners will pay more while those planning to buy a home on a medium budget can look forward to savings in the form of higher interest deductions.

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