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The acting finance minister pronounced the Interim Union Budget, 2019. In this alert, we bring to you a brief analysis of the tax proposals announced as part of the interim budget and other proposals. All the below amendments are proposed to be effective from fiscal year 2019-20.

Proposed Amendments to Income Tax Law:

In line with the tradition, the Union Budget being interim has only proposed limited changes to the tax law. With a stated objective of bringing certainty to small tax payers at the beginning of the year, the (interim) finance minister proposed the below changes to the current tax provisions:

  • Increase in tax rebate to individual tax payers

The Finance Act 2017 provided a rebate of up to INR 2,500 under section 87A of the IT Act to resident individuals with annual taxable income of up to INR 350,000. To provide relief to the middle-class taxpayers, the finance bill 2019 proposes to increase the maximum amount of such a rebate to INR 12,500. Further, this rebate shall be available to taxpayers having annual taxable income of up to INR 500,000.

Explained with below example: –

Particulars Situation-I Situation-II
Income 5,00,000 5,00,100
Computation of Tax
0 – 2,50,000 @ 0% 0 0
2,50,001 – 5,00,000 @5% 12,500 12,500
5,00,001 – 5,00,100 @20% 0 20
Rebate u/s 87A 12,500 0
Net Tax 0 12,520
Add: Cess @4% 0 501
Net Tax liability 0 13,021
  • Increase in standard deduction from salary

While taxpayers with business income are able to claim deduction of expenditure, no deduction of expense was available to the salaried class. The Finance Act 2018 introduced a standard deduction of INR 40,000 from salary income of all individual taxpayers. The (interim) finance minister proposes to increase such standard deduction from INR 40,000 to INR 50,000.

  • No notional rent income for up to two self-occupied houses

As per the provisions of section 23 of the IT Act, the annual value of one house owned by a taxpayer (but not actually let-out) could be taken to be nil, if the same was being used by the owner for residential purposes. Relief was also available in cases where the owner had to reside at a place not owned by him owing to employment, business or profession carried on by him and thus could not actually occupy his house. In case the owner has more than one house (which is not let-out), at the option of the owner relief was available to any one house and the other house(s) were subject to tax on a notional rent.

Considering the difficulty of the middle-class taxpayers having to maintain families at two locations on account of their job, children’s education, caretaking of parents etc., the finance bill 2019 proposes to extend the relief from one house to a second self-occupied house.Consequential amendment has also been proposed in section 24 of the IT Act in respect of deductions from income from house property.

  • Rollover benefit in respect to capital gains from transfer of residential house

Section 54 of the IT Act provides that capital gain from sale of a long-term capital asset by an individual or an HUF taxpayer, is not taxable to the extent that, such gain is invested into purchasing/constructing, a residential house within the prescribed time. This benefit is however restricted to investment in one residential house. The finance bill 2019 proposes to introduce a provision for a one-time exemption from long term capital gain of up to INR 20 mn for investment in two residential houses.

  • Notional rent on unsold inventory –not taxable up to two years

The Finance Act 2017 amended the provisions of notional rent under section 23 of the IT Act. In case of an immovable property held as stock-in-trade and not let out during the fiscal year, notional rent was exempted for the period of one year from the end of the fiscal year in which completion certificate was obtained. With an aim to give impetus to the real estate sector, the finance bill 2019 proposes to extend such period of exemption for levy of tax on notional rent from one year to two years from the end of the fiscal year in which completion certificate is obtained.

  • Cap on interest deduction in respect of self-occupied house property(ies)

As per the existing provisions of section 24 of the IT Act, the taxpayer is eligible to claim an interest deduction of up to INR 30,000 on capital borrowed to acquire, construct, repair, renew or reconstruct self-occupied property(ies). Further on fulfilment of certain conditions, the taxpayer is eligible to claim an interest deduction of up to INR 200,000 on capital borrowed to acquire or construct self-occupied house property(ies). The finance bill 2019 proposes to amend section 24 of the IT Act by inserting a new proviso stating that the aggregate amount of deduction in respect of the self-occupied house property(ies) shall not exceed INR 200,000.

  • Increase in threshold for withholding tax on interest & rent

Currently, no taxes are required to be withheld from interest of up to INR 10,000 paid on deposits held with banks, etc. Further, certain taxpayers paying rent to a resident in excess of INR 180,000 are required to withhold tax at the prescribed rates of 2%/10% as the case may be.

In order to provide relief to small taxpayers, it is proposed to increase the exemption threshold for withholding tax as follows:

Nature of payment Earlier threshold (INR) Proposed threshold (INR)
Rent 1,80,000 2,40,000
Interest from deposits held with banks, etc. 10,000 40,000
  • Time line extended for approval of housing projects eligible for tax holiday

Finance Act 2016 introduced profit linked tax holiday under section 80-IBA of the IT Act for taxpayers engaged in developing and building affordable housing projects, subject to fulfilment of certain conditions. The said deduction was available if the project was approved by a competent authority after 1 June 2016, but on or before 31 March 2019. For making more homes available under affordable housing, the (interim) finance minister proposes to extend the benefits to projects approved on or before 31 March 2020.

  • Instilling Compliance & Increasing Collections

While announcing the budget proposals, the finance minister highlighted key achievements from the measures introduced by the present government. He highlighted that owing to reduction in tax rates and improved taxpayer interface with tax authorities, there has been more than 80% increase in the last five years in the number of tax returns being filed and tax collections. He also highlighted how measures such as Black Money Law, Demonetisation, etc. have resulted in taxation of huge sums of undisclosed income, attachment of benami assets (including foreign assets) and de-registration of several shell companies.

  • Using Technology to Simplify Tax Systems

Amongst other measures to simplify the tax system, the (interim) finance minister in his budget speech announced how the tax department functions online and that over the years tax return filing, assessments, tax refunds and queries will be undertaken online, with minimum human intervention. He explained that his government envisages that within two years, almost all verification and assessment of tax returns selected for audit will be done electronically through an anonymised back office, without any personal interface between taxpayers and tax authorities. He also expressed the government’s intention to introduce a technology intensive project wherein all tax returns will be processed within 24 hours of filing and tax refunds issued simultaneously.

Post Author: Naidu Datti

Mr Naidu, an aspiring young professional, is associated with BDO for the past 4 years. Over years, he has gained experience on several transactions involving International Taxation. Through his articles on VirtuaLaw, he shares his experience through various case studies. You may reach him at naidu@virtualaw.in.

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