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Budget 2014 and Tax Planning

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Budget 2014 and Tax Planning



Budget offers several goodies to taxpayers.
Find out how much you stand to gain from the various measures announced

KOMAL AGARWAL hasn't stopped smiling since Finance Minister Arun Jaitley tabled his maiden Budget in Parliament on 10 July .


The Delhi-based finance professional (see picture) will see her tax liability reduced by almost `10,000 this year, thanks to a higher basic exemption and an enhanced deduction for investments under Section 80C. "I can save more, so my tax will be down to `2,000 or so," she says.

Indeed, the Budget lived up to the BJP's promise of ushering in achche din. The basic exemption limit for ordinary taxpayers has been raised from `2 lakh to `2.5 lakh. For senior citizens above 60 years, the limit has been increased from `2.5 lakh to `3 lakh. There is no change in the `5 lakh tax exemption for very senior citizens above 80 years old.

The Budget has also enhanced the annual deduction available under Section 80C from `1 lakh to `1.5 lakh. This was a long-pending demand of taxpayers. The `1 lakh limit was set nearly a decade ago and gets exhausted quickly due to the multiplicity of investments under Section 80C.


CUT TAX BY SAVING MORE

The proposed changes can lead to significant tax savings for those who can save more under Section 80C. The taxpayers earning more than `10 lakh a year stand to save up to `20,000 a year in tax. The raising of the basic exemption limit by `50,000 will save `5,000 in tax, while the `50,000 increase in the investment limit under Section 80C will help them save another `15,000.

However, the potential tax savings are lesser for those in lower tax brackets.
Taxpayers earning up to `10 lakh a year will be able to save `15,000, while those with an income of up to `5 lakh a year will save a maximum of `10,000 in tax. This, if they can find additional `50,000 to invest in Section 80C.

However, those in the lowest tax bracket still have something to smile about. The budget has not removed the `2,000 tax relief given in Budget 2013 to those earning below `5 lakh a year. This means that individuals earning up to `4.2 lakh a year and investing `1.5 lakh under Section 80C will go out of the tax net.


HOME LOAN BENEFITS

The finance minister also announced additional tax benefits for home loan customers, increasing the deduction from `1.5 lakh to `2 lakh a year. In Pune, IT professional Rajesh Varma and his schoolteacher wife, Suruchi Mishra, are busy calculating their savings under the new tax structure. Besides the higher basic exemption and deduction under Section 80C, the couple has a joint home loan, which means their annual tax savings are close to `35,000. This Budget has been very beneficial for taxpayers like us.

While the middle-class taxpayers have welcomed the Budget, super-rich taxpayers might be sulking. The finance minister has retained the tax structure of the previous year, including 10 percent surcharge on tax for those with an income of over `1 crore. The then finance minister P Chidambaram had introduced the `Robin Hood' surcharge in 2013 as a one-time measure. This year's Budget has extended the levy .

The rich taxpayers will also have to contend with the changes in tax rules relating to debt funds.

The Budget has extended the Section 80C limit and raised the basic exemption, but is miffed with the change in rules on debt funds.

Till now, one could invest in debt funds and get taxed at a lower rate after a year. The Budget has increased the minimum holding period to three years, which will curtail liquidity . Also, the option to pay a flat 10 percent tax has been removed.

Investors will no longer have a choice between flat 10 percent and 20 percent after indexation. The latter will become the norm.

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