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Budget 2017: Income Tax Rates Reduced, Capital Gains Rejigged and Surcharge Added

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Budget 2017
Let’s cut the bull and understand exactly what’s happened in the budget. We’ll have posts on each topic but here’s the summary of what you really want to know: Has My Tax Come Down?

Personal Tax: 10% Slab Becomes 5%, Surcharges Increased

The first slab, of income from Rs. 250,000 to Rs. 500,000 used to be taxed at 10%. Now it will be 5%.
If you make Rs. 500,000 or more (after all deductions) you will pay 5% lower tax on the first slab. That means instead of paying Rs. 25,000 (10% of the slab) you will pay Rs. 12,500.
Effectively everyone who makes more than Rs. 5 lakh a year gets Rs. 12,500 per year as an income tax benefit!
But if you make more than Rs. 50 lakh per year, be ready to pay 10% more as a surcharge on your tax. If you make more than Rs. 1 crore per year, that surcharge increases to 15% (but this last bit was there earlier too).

Companies: Less than 50 cr. turnover, Pay only 25%

Apparently 96% of all companies make less than Rs. 50 cr. in turnover. And such companies will pay much lower taxes – 25% instead of the 30% they would otherwise pay.
However, there continues to be a 7% surcharge on tax for profit of Rs. 1 to 10 crores. And 12% surcharge on tax above Rs. 10 crore.

Dividends: LLPs Pay Dividend Taxes for 10 lakh or more

If you are an individual and you got dividends of more than Rs. 10 lakh, you would pay 10% further as dividend tax. (Otherwise, dividends are non taxable)
The budget in 2017 has introduced this tax even for LLPs. Only companies, trusts and institutions are exempt.
Many companies have promoters that are LLPs, such as Reliance Industries. This is a tax loophole that has now been fixed.

Capital Gains: Only 2 Years for Long-Term in Property

If you buy a house, you have to hold it for three years before selling, in order to claim long term capital gains. (Otherwise, it’s short-term and thus, added to your income)
Budget 2017 changes it to 2 years. This is the same as unlisted shares (where two years of holding applies for LTCG).
Most property is held longer, but this change gives investors a chance to flip property faster, if they can. It may only have a small impact.

More Long Term Capital Gains: Base Year Change and Joint Agreement Reform

  • If you enter into a joint development agreement for your property with a developer, there is usually an agreement to sell. This may have a tax hit for you, but the property has not yet been developed. Budget 2017 sets this tax to when the property’s construction is finished.
  • But in the above case, a 10% TDS is applicable on any money paid when entering into the sale agreement.
  • Also, if you bought any property (or shares or bonds) before 1/4/2001, then you can take the price as of 1/4/2001 as your acquisition price instead of your actual acquisition price. (You can take either price, whichever you are okay with) This has a big benefit to those people who have inherited properties bought many many years ago, and whose input prices are low. They get to use the 2001 prices and index them further.
  • We’ll have another post on this: If you didn’t pay STT on purchase of shares then selling those shares will no longer give you an exemption. However, IPOs, Bonus Shares and Rights issues are exempt.

The Personal Taxes: Up and Down

Personal taxes are down for those with income less than Rs. 50 lakh. For them, they pay Rs. 12,500 less tax than earlier.
Long term capital gains tax changes are mostly positive for the small taxpayer, but negative for certain corporates.  Dividend taxes too affects larger LLPs.
Overall, people should be pleased with the impact of personal taxes – and the Rs. 1,000+ extra per month is a small but measurable bonus. Smaller corporates too will be quite happy that 25% is the tax rate for them going forward. It’s been a good budget that way!
Budget 2017

  • Priyanka says:

    Hi Deepak,
    Thanks for a good clarification on this aspect of the budget. Can you explain how moving the indexing year to 2001 will benefit in capital gain taxes. As per my understanding, if the indexing year has been made 2001, for an old property let’s say, my acquisition cost will be lowered now and thus the capital gains will be more and hence more tax will be levied. Correct me if I am wrong and it will be helpful if you can clarify how is this move beneficial.

  • Deepa says:

    Hi Deepak,
    A very informative article on understanding the tax points of the Union Budget. From the tax payers’ point of view, the slash in income tax slab seems to be a good move. Thank you for sharing your detailed insights on the topic.