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What are the income tax changes effective from April 1, 2018 for individual taxpayers?

We summarize the income tax changes announced during Budget 2018 which are effective from April 1, 2018 for individual taxpayers.

#1 Change in standard deductions:

  • A standard deduction of Rs. 40,000 has been introduced for salaried taxpayers and individuals who receive pension. This means an amount of Rs 40,000 can be reduced from the gross salary without any proof.
  • Existing deduction under the head of annual transport allowance of Rs 19,200 and Rs 15,000 medical reimbursement has been removed.
  • Overall this amounts to a deduction of Rs. 5800 resulting in tax savings as mentioned below:

#2 Introduction of Health & Education Cess:

‘Primary Education Cess’ of 2% and ‘Higher & Secondary Education Cess’ of 1% has been replaced by ‘Health & Education Cess’ of 4% to be levied on the income tax paid.

#3 Introduction of long term capital gains tax(LTCG) on equity mutual funds:

LTCG tax of 10% has been introduced. With this, investors will have to pay 10 per cent tax on profit exceeding Rs 1 lakh made from the sale of equity mutual fund schemes held for over one year. Accrued capital gains up to January 31st are ‘grand-fathered’ which means that they will never be taxed. An example of an investment in equity mutual funds and the resulting LTCG tax will be as below:

#4 Introduction of dividend distribution tax (DDT) on equity mutual funds:

A dividend distribution tax has been introduced on equity mutual funds with dividend option. If an MF gave out a dividend of Rs. 100, earlier the investor would get 100% of the dividend i.e. Rs. 100 but with the introduction of this tax, an investor will now get only 90% i.e. Rs. 90, 10% would be paid as DDT to the government.

#5 Change in National Pension Scheme (NPS) for non employee subscribers:

Withdrawal of NPS investments have been partially taxable only for salaried employees. This means that withdrawal of 40% of the amount of accumulated corpus paid to the investor on closure of NPS can be claimed as tax-exempt. This benefit is now available to non salaried individuals as well.

#6 Additional benefits for senior citizens (A senior citizen is a resident individual who is older than 60 years.):

6.1 Change in interest income exemption:

Exemption of interest income for fixed/ recurring deposits invested in banks and post offices has been increased from Rs.10,000 to Rs.50,000. Senior citizens can no longer claim exemption of Rs. 10,000 on the interest income of savings bank account which was available earlier.

6.2 Change in deduction limit for medical expenditure:

The deduction limit for medical expenditure for certain critical diseases has been increased from Rs. 60,000 (in case of senior citizens) and from Rs. 80,000 (in case of very senior citizens-resident individual older than 80 years) to Rs. 1 lakh for all senior citizens under section 80DDB.

The deduction limit for health insurance premium/ preventive health check up has been increased from Rs. 30,000 to Rs. 50,000 under section 80D.

6.3 Change in investment limit for Pradhan Mantri Vaya Vandana Yojana(PMVVY)

PMVVY is a scheme meant for senior citizens that offers a guaranteed return of 8%. The investment limit in this scheme has been increased from 7.5 Lakhs to 15 Lakhs and the scheme which was supposed to be open for a year initially has been extended to remain open till March 2020.

#7 Change in Employee provident fund (EPF) contribution:

Women joining the workforce for the first time will have to contribute only 8% instead of 12% or 10% as the case may be, for the first three years. This will enhance their take-home pay.

#8 Introduction of penalty for filing Income Tax Returns(ITR) late:

The due date for filing ITR is July 31 every year. From April 1, 2018 onwards, for taxpayers with income more than Rs. 5 Lakh, if the return is filed after the due date but before December 31, 2018, a penalty of Rs. 5000 would be levied. If filed after December 31, 2018 a penalty of Rs. 10000 would be levied. For taxpayers with income less than Rs. 5 Lakh, maximum penalty of Rs. 1000 would be levied for late filing of returns.

#9 Change in tax exempted gratuity limit:

The gratuity for employees has been tax free upto a limit of Rs. 10 lakhs, but this limit has now been increased to Rs. 20 lakhs (This change is not a part of the budget but as a bill passed in the parliament).

Gratuity is a part of one’s salary and is paid by an employer to an employee after rendering services for at least five years in the same organisation.

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