The most awaited Budget of the Modi government is here. There were many hopes from the Finance Minister about granting some relief to individual taxpayers. Let’s see how the announcements made by the Finance Minister in this Budget with regard to tax provisions will affect individual taxpayers.

Hiked basic exemption limit

Amid the hopes of the exemption limit being raised to Rs 5 lakh, the FM has enhanced the basic exemption limit by Rs 50,000 only for individuals. For a person below the age of 60, no tax is payable now up to Rs 2.5 lakh as against Rs 2 lakh earlier. Likewise, the exemption limit for senior citizens has gone up to Rs 3 lakh from the present Rs 2.5 lakh.

Enhanced deduction u/s 80C, 80CCD

At present, an individual can claim deduction up to Rs 1 lakh for various items such as PF, NSC, PPF, tuition fee, ELSS, repayment of home loans, contribution to NPS, contribution to pension funds and life insurance premium etc. The FM has proposed to increase the limit to Rs 1.5 lakh.

This was much-needed enhancement as the home loan repayment and provident fund contributions have gone up substantially of late and the amount of tax benefits available for these contributions/expenses have not kept pace with the inflation. This should have been raised much more than just by Rs 50,000. Anyway something is better than nothing.

Increased rebate for amount of interest on home loan

At present, an individual is entitled to claim a deduction of up to Rs 1.5 lakh in respect of interest paid on money borrowed for purchase/construction of one house property in case the property is used for his own residence. The FM has raised this deduction of Rs 1.5 lakh to Rs 2 lakh. In respect of let-out property or a property which is treated as let-out property, full interest can be claimed.

For claiming benefit on money borrowed for house, it is not necessary that money should have been borrowed from a financial institution; you can even claim the tax benefits on money borrowed from your friends and relatives.

Deduction for investment of capital gains in residential house property:

At present, an individual can claim tax exemption from long-term capital gains in case the taxpayer buys or constructs a residential house whether in India or abroad. The FM proposes to provide that the exemption from long-term capital gains shall be available only if the investment is made for buying or constructing one residential house in India. Now the long-term capital gains exemption cannot be claimed in case an assessee buys or constructs a residential house property abroad.

Quantum of investment in bonds for availing LTCG exemption

At present, due to wording of the law the assessee was able to claim deduction of Rs 50 lakh in each year for investment in capital gains bonds of the National Highways Authority or Rural Electrification Corporation if the period of six months, within which the assessee was required to make investment, fell in two financial years. This was actually a loophole in the law and which the FM intends to plug in by providing that the total exemption in respect to long-term capital gains (LTCG) for investment in capital gains bond shall be restricted to Rs 50 lakh even if the period of six months fell in two financial years.

Amount of advance received for sale of capital asset and forfeited

The FM has proposed to tax the amount of any advance received by individuals for sale of a capital asset and which is ultimately forfeited by him and transaction did not go through. Till now, such forfeited amount was reduced from the cost of the asset to arrive at the taxable capital gains. This proposed amendment will make any amount of advance received and forfeited taxable immediately rather than its tax impact coming subsequently in the year of sale of the capital asset in question.

Tax on capital gains of debt fund units

The FM has proposed two changes in the taxation of mutual fund units of debts funds. At present, units of mutual funds of all schemes whether equity-oriented or debt schemes become long-term if held for more than 12 months. Now, the FM proposes to change the holding period requirement from 12 months to 36 months for schemes other than equity-oriented schemes. So you will have to hold units of debt and gold funds for more than 36 months. Moreover, at present the taxpayer has an option of paying tax either at 10% in un-indexed profit or 20% on indexed profits on transfer to units of such mutual funds. Here, the FM proposes to withdraw the option of benefit of 10% tax without indexation. So now the long-term capital gains on sale of units of mutual funds will be taxed at 20% of indexed gains. This amendment has significant tax implications, as the investors who had invested in such schemes relying on the existing provisions of law will have to pay tax on transfer of units of such schemes even if these had become long-term, had this amendment not come. These provisions will apply to even the cases of all transactions effected on or after April 1, 2014. So even for a taxpayer who had sold his units of debt funds on April 1 after having held for 12 months would have paid his advance tax treating such gains as long-term. So if the proposed amendment becomes a law, the capital gains earned by him now will be treated as short-term and the taxpayer will have to pay tax as if it was his regular income. To this extent, the amendment works like retrospective amendment of the law.

This amendment is going to impact a lot of investors who had invested in FMP for 366 days and more on the assumption that they will be entitled to the benefits of double indexation. Now they will have to pay tax at regular rates rather than that income being free in their hand due to existing twin benefit of holding period requirement and double indexation available on such FMPs.

The author is CFO, Apnapaisa. The views expressed in this article are his own

Earlier in the mid 19th century, our forefathers didn’t have many options for investment. There were only bank deposits, postal savings schemes, gold and real estate. Even in the early 1990s, after the emergence of stock market, very few people use to invest in the equity shares. Real estate has been the perennial favourite investment instrument of our forefathers. Some of you must have also inherited properties and must not have sold yet those properties and kept as it is for capital appreciation.

Today, a lot of things have changed. After globalisation, we have a number of investment options such as mutual funds, bonds, PMS, ETFs, international funds (of mutual funds) and other alternative investments. But still we see people investing heavily in real estate.

Why do people invest in real estate?

Capital appreciation

A majority of the investors have a belief or I would rather call it a myth “property value never falls”. This statement is true to some extent, since historically in the past 23 years, property prices have fallen only during 1999 and the prices recovered by the year 2004 (as per the data from Ready Reconker, Mumbai). Primary reason for any kind of investment is appreciation. In the past 4-5 years, real estate has performed extremely well and has given supernormal returns. These supernormal returns have attracted investors. Also, there is less volatility in property prices as compared to equity investment.

Regular income

Ready to occupy properties can be leased and you can earn regular rental income. Rental income is another attraction, since you earn regular rent that adds to your income along with capital appreciation.

Usually, investors increase the rent annually by 8-10%. The net rental income, what you get in hand is less of taxes, maintenance and other operating costs. Though there is regular rental income, there are chances of vacancy for certain period due to prevailing market conditions.

Easy availability of debt capital/leverage

Purchasing a property is a lumpy investment. If you do not have sufficient funds to buy a house, you can take a home loan for the balance amount. Today home loans are available at the rate of 10-11% p.a. from banks and Housing Finance Companies (HFCs). Investors take home loan (leverage) to increase the return on property investment. As long as the investment (i.e. property) return is greater than the interest paid to lender (i.e. home loan interest rate), there is positive leverage and thus the overall return magnifies. So, with the help of leveraging, you can take benefit of price appreciation in property prices, by contributing only certain sum of money from your pocket and balance amount by taking a home loan. Leveraging is one of the key benefits for real estate investment over other investment instruments, since you cannot leverage for investing in mutual funds, fixed deposits (except for Futures & Options where you can leverage but they carry high risk).

Diversification

As it is said, you should not put all the eggs in one basket, you must diversify your investment portfolio and not go overboard on a single asset class. Lower the correlation (price movement of two assets in same direction), greater the diversification benefits. Real estate is considered to have very low correlation with other asset classes such as equity and debt i.e. real estate prices are not affected by price movement in equity or debt market and vice-versa. Thus, real estate as a component of your overall investment portfolio helps you reduce the overall risk and diversify your portfolio.

Inflation hedge

Just like gold, real estate is considered as a hedge against inflation. This means property prices and lease rents increase as the inflation increases. This helps you earn real returns (i.e. net of inflation).

Every coin has two sides. Similarly, real estate as an investment has its pros and cons. Real estate attracts high tax on rental income as well as appreciation on sale of property (capital gains), poor liquidity, and uncertainty of lease renewal when lease expires. Real estate investment (except land) has both bond-like and stock-like characteristics. Lease rental payments serve as periodic fixed coupon (interest) payments like bond and price appreciation like shares, which depends on state of the overall economy. It is important to review your real estate investment periodically and maintain appropriate asset allocation. Diversifying your portfolio with real estate investment is a good strategy, but you should not have real estate heavy portfolio.

The author is Research Analyst, ApnaPaisa.com. The views expressed in this article are his own

I am a retired government servant drawing pension and an I-T assessee. I have received medical reimbursement for my eye surgery from the government. Kindly clarify:

• If it is to be included in income from pension for FY 2010-2011?
• Whether it is fully/partially exempted from tax and under which section? — Ashraf

The pension income is chargeable to tax under the head ‘income from salary’. Therefore, in my view, the provisions of Section 17(2) of the Act relating to perquisite should also be applicable in case of an ex-employee. The aforesaid section exempts any sum paid by an employer in respect of any expenditure actually incurred by the employee on his medical treatment in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purpose of medical treatment of its employees. I am of the view that the above clause should be applicable to you and therefore the amount received as re-imbursement towards your eye surgery should not be chargeable to tax in case the surgery was performed in any of the hospitals referred to hereinabove.

In reply to the query of BK Bindal you have stated that "The amount of bank interest in your case being less than the maximum amount (i.e. Rs 2,00,000) which is not chargeable to income tax, you can file form 15G in accordance with provisions of Section 197A...." (The Tribune, July 14, 2014). This means interest income up to Rs 2,00,000 is fully exempted. However, on the same page Balwant Jain in his article “Filing I-T return: Include all your ‘other’ incomes” has stated that interest income is exempt only up to Rs 10,000. Please clarify. — Ashwani Kumar

A conjoint reading of the provisions of sub-section (1) & (1B) of Section 197A of the Income-tax Act 1961 (The Act) would make it clear that in case income of any assessee under any of the heads referred in sub-section (1) of Section 197A of the Act is less than the maximum amount which is not chargeable to tax, it should be possible for an assessee to file form 15G with the principal officer concerned requesting him not to deduct tax at source on the said income. The aforesaid section does not by any chance, lead to the presumption with regard to non-applicability of other provisions of the Act. Your reference to the article of Balwant Jain regarding the exemption of interest income to the extent of Rs 10,000 is relevant for the computation of total income. One of the sections of the Act provides that any interest earned in a savings bank account to the extent of Rs 10,000 would not be chargeable to tax and Balwant Jain must have clarified the position of the Act on the basis of the said provision. The querist had sought my opinion whether it is possible for him for file form 15G for non-deduction of tax at source. I had given my opinion on this limited issue on the basis of provisions of the aforesaid sections as the interest income of the querist was below the amount of Rs 2,00,000 being the maximum amount on which tax is not chargeable.

If a person gets an income of Rs 1 lakh in a financial year from short-term capital gains from equity shares and when there is no other income except short-term capital gain, what is the income tax liability and tax treatment. If taxable, what is the percentage of tax to be paid if the income is generated during FY 2013-14. — Suresh

In case of an individual being less than 60 years of age, the maximum amount not chargeable for assessment year 2014-2015 (i.e. financial year 2013-14) as prescribed by the Finance Act 2013 is Rs 2,00,000. The total income of the querist, including the amount of short-term capital gain being less than Rs 2,00,000, no tax liability would arise for the aforesaid assessment year.