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Chapter 2 Planning your tax for FY19? Here are some pointers to consider

While planning your taxes for the fiscal year (FY) 2018-19, it is essential to first understand the key changes in the Union Budget 2018. The Budget 2018 brought about some far-reaching changes that could make a significant difference to the tax liability of individuals. Some of the important announcements included the introduction of capital gains tax on equities, introduction of dividend distribution tax (DDT) on equity funds, reintroduction of standard deduction, tweaking the rates of tax, and some additional sops for senior citizens.

Let us look at some of the key changes from this Budget that are applicable for FY2018-19 as these will have a bearing on your tax liability as well as your tax planning methodology.

Tax rates maintained at same slabs

In the Union Budget 2017, the slab rates of tax at the lowest taxable rate of Rs. 2.5lakh to Rs. 5 lakh were reduced from 10% to 5%. That classification has been maintained in the Assessment Year (AY) 2019-20 also. It needs to be remembered that the distinction of male assessees and female assessees does not exist any longer. There are only special rates of tax for senior citizens (above 60) and for super senior citizens (above 80).

For others, the slab rates for income tax are as under:

Income Slab Tax Rate (Assessees below 60)
Up to Rs. 2,50,000 Nil
Rs. 2,50,001 - Rs. 5,00,000 5% of income in excess of Rs. 2.50 lakh
Rs. 5,00,001 - Rs. 10,00,000 20% of income in excess of Rs. 5 lakh
Above Rs. 10,00,000 30% of income in excess of Rs. 10 lakh

Senior citizens are required to pay tax at slightly lower rates compared to assessees below the age of 60.

The rates of tax for senior citizens are as under:

Income Slab Tax Rate
Up to Rs. 3,00,000 Nil
Rs. 3,00,001 - Rs. 5,00,000 5% of income in excess of Rs. 3.00 lakh
Rs. 5,00,001 - Rs. 10,00,000 20% of income in excess of Rs. 5 lakh
Above Rs. 10,00,000 30% of income in excess of Rs. 10 lakh

For super senior citizens, these tax slabs have been further compressed into just three slabs as under:

Income Slab Tax Rate
Up to Rs. 5,00,000 Nil
Rs. 5,00,001 - Rs. 10,00,000 20% of income in excess of Rs. 5 lakhs
Above Rs. 10,00,000 30% of income in excess of Rs. 10 lakh

In addition to the above basic rates of tax, the following additional charges will be payable as levy to the Government of India for FY2018-19
corresponding to AY2019-20.

  • An additional surcharge of 10% will be levied in case income exceeds Rs. 50 lakh in a financial year.
  • If the income in a financial year exceeds Rs. 1cr, then the surcharge is hiked to 15% from 10%.
  • In addition to the surcharge (which is only applicable above Rs. 50 lakh) there is a Health and Education Cess of 4% which is payable by all assessees irrespective of the level of income.

Let us look at the impact of surcharge and the Health and Education Cess on different levels of taxable income for FY2018-19 (AY2019-20)

Particulars Middle Income Bracket Higher Income Bracket Super-Higher Income Bracket
Taxable Income Rs. 38,00,000 Rs. 65,00,000 Rs. 1,15,00,000
Surcharge Applicable Nil 10% 15%
Income Tax on Slab Rs. 9,52,500 Rs. 17,62,500 Rs. 32,62,500
Surcharge N.A. Rs. 1,76,250 Rs. 4,89,375
Health and Education Cess (4%) Rs. 38,100 Rs. 77,550 Rs. 1,50,075
Total Tax Liability Rs. 9,90,600 Rs. 20,16,300 Rs. 39,01,950

The above illustration shows how the basic tax rate, surcharge, and the Health & Education Cess add up to determine your eventual tax liability. There is an important point we need to remember about the Health and Education Cess effective FY2018-19.

Till the previous year, there was an education cess of 2% and an additional higher education cess of 1%. In the financial year 2018-19, these two cesses have been merged into a single cess called the Health and Education Cess and are chargeable at 4%. Effectively, the rate of cess has increased in FY2018-19 from a combined rate of 3% to a consolidated rate of 4%. One also needs to remember that the cess is charged on the total sum of (tax + surcharge). Thus, the impact of the cess on higher income groups is effectively much higher.

Hike in Education Cess in FY 2018-19

This has been discussed in the income tax slab calculation but let us understand this in greater detail. A cess is imposed in addition to the tax and is a levy on the tax. So a cess of 5% essential means that it is imposed at 5% on the tax amount. The total tax liability is the basic liability plus the cess payable. Additionally, the cess is imposed on the sum total of the tax payable and the surcharge, so the impact is much higher on high income groups.

Let us see how three income groups were impacted by the cess in the last two assessment years.

Particulars Mid Income
Mid Income
High Income
High Income
HNI Income
HNI Income
Taxable Income Rs. 32 lakh Rs. 32 lakh Rs. 70 lakh Rs. 70 lakh Rs. 1.25cr Rs. 1.25cr
Base Tax Payable Rs. 7,72,500 Rs. 7,72,500 Rs. 19,12,500 Rs. 19,12,500 Rs. 35,62,500 Rs. 35,62,500
Tax Surcharge N.A. N.A. Rs. 1,91,250 Rs. 1,91,250 Rs. 5,34,375 Rs. 5,34,375
Education cess (2%) Rs. 15,450 N.A. Rs. 42,075 N.A. Rs. 81,938 N.A.
Higher Edu Cess (1%) Rs. 7,725 N.A. Rs. 21,038 N.A. Rs. 40,969 N.A.
Health & Edu Cess (4%) N.A. Rs. 30,900 N.A. Rs. 84,150 N.A. Rs. 1,63,875
Total Tax Payable Rs. 7,95,675 Rs. 8,03,400 Rs. 21,66,863 Rs. 21,87,900 Rs. 42,19,782 Rs. 42,60,750
Effective Tax Rate 24.86% 25.11% 30.96% 31.26% 33.76% 34.09%

As can be seen from the above table, the increase in the effective tax rate is a result of the increase in the cess from 3% to 4% over the last one year.

There is an important point to remember pertaining to the filing of returns. Each year, the returns have to be filed by July 31 (for 2018, the last date has been extended to August 31). That means for the income pertaining to the financial year 2017-18, corresponding to the AY2019-20, the last date for filing returns shall be August 31, 2018.

Now, under Section 234F of the Income Tax Act, a compulsory penalty will be charged if the returns are filed after the said date. Such penalty will have to be paid in advance before filing the said returns.

Sr.No. Year Period to file delayed return
(after due date)
Period to file revised return
(after due date)
Can delayed return be revised?
1. Till financial year 2015-16 Can be filed till two years from the end of the financial year. Can be filed till two years from the end of the financial year. No, a delayed return cannot be revised.
2. For financial year 2016-17 Can be filed till one year from the end of the financial year. Can be filed till two years from the end of the financial year. YES, a delayed return can be revised till one year from the end of financial year.
3. From financial year 2017-18 Can be filed till one year from the end of the financial year. Can be filed till one year from the end of the financial year. YES, a delayed return can be revised till one year from the end of financial year.

Standard deduction on income from salaries and pensions

A standard deduction of Rs. 40,000/- in lieu of transport and reimbursement of miscellaneous medical expenses will be allowed effective FY2018-19 corresponding to the AY2019-20. A unique feature of this mandatory deduction is that apart from salary earners, this facility will also be available to pensioners as they do not get any such benefits.

However, there are a few things one needs to understand from a tax-planning perspective. For example, the standard deduction is in lieu of medical allowance and transport allowance. Currently, salaried individuals are eligible for tax exemption up to Rs. 19,200 pa on transport allowance and Rs. 15,000 pa on medical allowance.

Look at the incremental benefit for an individual salaried employee in the table below.

Details AY2018-19 AY2019-20
Gross Salary Rs. 650,000 Rs. 650,000
Transport Allowance (Rs. 1,200 per month is exempt) Rs. 19,200 N.A.
Medical Allowance Rs. 15,000 N.A.
Standard Deduction N.A. Rs. 40,000
Net salary post deductions Rs. 6,15,800 Rs. 6,10,000
Impact of shift to Standard Deduction Net salary reduces by Rs. 5,800 due to standard deduction

The tax saving is much smaller in the case of salaried individuals as they are losing out on the medical allowance and the transport allowance. However, in the case of pensioners, who do not receive transport and medical allowance, this standard deduction of Rs. 40,000 comes as a major boon. And this does not, in any way, impact their medical reimbursements and hospitalization coverage under government schemes.

But does it really benefit in the overall scheme of things? When you compare the impact of standard deduction in two years, you must consider the combined effect of the loss of medical allowance and transport allowance plus the higher cess of 4% that you pay.

This is how the combined impact works out.

Tax Calculation on Salary AY2018-19 AY2019-20
Gross Pension Received Rs. 28,25,000 Rs. 28,25,000
Transport Allowance (Rs. 1,200 per month is exempt) Rs. 19,200 N.A.
Medical Allowance Rs. 15,000 N.A.
Standard Deduction N.A. Rs. 40,000
Net salary post deductions Rs. 27,90,800 Rs. 27,85,000
Income Tax Calculations
Income Tax Rs. 6,49,740 Rs. 6,48,000
Surcharge 0 0
Education Cess (2% of tax payable) Rs. 12.995 N.A.
Secondary and Higher Education Cess (@1% of tax payable) Rs. 6,497 N.A.
Education and Health Cess (combined rate of 4% of tax payable) -- Rs. 25,920
Total Tax Liability Rs. 6,69,232 Rs. 6,73,920
Additional tax paid under the New Standard Deduction formula -- Rs. 4,688

So the net outcome is that when you consider the combined effect, you actually end up paying higher taxes in the post standard deduction scenario.

Higher deduction for medical insurance premium for senior citizens (Section 80D)

Currently, Section 80D permits separate deductions for your family and for your parents. The deductions are much higher if your dependent parents are senior citizens above the age of 60.

The amount of deduction available to senior citizens for payment of mediclaim premium is increased as follows:

Existing deduction limit From FY2018-19 (AY2019-20)
Deduction allowed for senior citizens and very senior citizens
Rs. 30,000/- Rs. 50,000/-

Effectively, the deduction for senior citizens has been raised from Rs. 30,000 pa to Rs. 50,000 pa in terms of contribution to medical insurance premium paid to IRDA-approved health insurance schemes.

In the best scenario, if you are aged 61 and your father is aged 85, then you can claim a total medical insurance premium rebate of Rs. 100,000 (Rs. 50,000 for your family and Rs. 50,000 for your parents) and that will take your effective tax shield on medical premium to approximately 30% of the tax contribution. Considering the rising medical costs, you can make the best of this benefit.

Deduction for expenditure incurred on medical treatment, etc. (Section 80DD)

Currently, the Section 80DD pertains to the expenditure on medical treatment for senior citizens. It was available in slabs for senior citizens and for super senior citizens, but has been since merged into a single higher limit as under:

Existing deduction limit From FY2018-19 (AY2019-20)
Deduction allowed for:
Senior Citizens: Rs. 60,000/- Senior Citizen and Very Senior Citizen: Rs. 1,00,000/-
Very Senior Citizen: Rs. 80,000/-

Deduction in respect of interest on deposits in savings accounts for senior citizens

This is was one area of major discomfort for senior citizens. Many senior citizens depend on interest from investments to meet their household expenses. However, the limit of exemption on this interest income at Rs10,000 was too low for the full year. Additionally, this facility was only available for savings bank accounts and not for fixed deposits (FDs) and recurring deposits (RDs).

The Union Budget 2018 made some special changes for the sake of senior citizens and super senior citizens as under:

Particulars Existing deduction limit From FY2018-19 (AY2019-20)
Deduction allowed for senior citizens and very senior citizens:
Interest from savings bank account / post office Rs. 10,000/- Rs. 50,000/-
Interest from FDs and RDs Nil

This higher exemption is only available for senior citizens and very senior citizens. For regular tax payers under the age of 60, the old exemption limit of Rs. 10,000 pa will be applicable. Senior citizens can now avail tax-free interest to the extent of Rs. 50,000 pa. However, this is not the biggest benefit for them. Under Section 194A, no TDS will be deducted on the amount of such interest earned by senior citizens and very senior citizens up to Rs. 50,000. Currently, TDS is deducted and senior citizens are either required to submit Form 15G in advance or have to claim a refund from the Income Tax department. More than the tax liability, it was the process that was cumbersome; this has now been resolved.

Changes in taxation on long-term capital gains (LTCG) on equities

Long-term capital gains on equities and equity funds were hitherto tax-free until FY2017-18. However, effective April 2018, all long-term capital gains (LTCG) on equities are taxable at a flat rate of 10%. There is a basic exemption of Rs1 lakh and any gains above this limit in a the given assessment year will be taxable at 10%. This means that the benefit of indexation will not be available in these cases. The LTCG tax will be applicable to equity investments, equity funds (diversified equity funds, balanced equity funds, arbitrage funds, index funds, etc.). This will substantially change the economics of capital gains calculation in the case of equities.

Consider the table below:

Pre-LTCG Tax Calculation Post-LTCG Tax Calculation
Retirement SIP monthly Rs. 10,000 Retirement SIP monthly Rs. 10,000
Tenure of SIP 25 years Tenure of SIP 25 years
Invested in Equity Funds Invested in Equity Funds
CAGR returns 14% CAGR returns 14%
Amount Contributed Rs. 30,00,000 Amount Contributed Rs. 30,00,000
Final Corpus Rs. 2,72,72,777 Final Corpus Rs. 2,72,72,777
Long-Term Capital Gain Rs. 2,42,72,777 Long-Term Capital Gain Rs. 2,42,72,777
Basic Exemption N.A. Basic Exemption Rs. 1,00,000
Taxable LTCG N.A. Taxable LTCG Rs. 2,41,72,777
Tax on LTCG (Nil) N.A Tax on LTCG (10%) Rs. 24,17,278
Net Corpus on hand Rs. 2,72,72,777 Net Corpus on hand Rs. 2,48,55,499

As can be seen from the above table, the LTCG tax is making a significant difference to your post-tax wealth, especially when you are indulging in long-range SIPs over a long period. In such cases, the capital gains component is quite high, and hence, investors will have to either increase their monthly SIP contribution by 10% or they will have to be mentally prepared for lower corpus retention in post-tax terms.

There are some finer points that investors need to be aware of in this case. The gains earned up to January 31, 2018, are exempt. Let’s us understand this with an example.

Equity shares of a company were purchased on July 01, 2017, at Rs. 100 per share and were sold on September 01, 2018, for Rs. 130 per share. This results in a long-term capital gain of Rs. 30 per share. Now, suppose the highest share price on January 31, 2018, was Rs. 120 per share. Then, the taxable LTCG will be Rs. 10, i.e. Rs. 130 - Rs. 120 = Rs. 10 as the price on January 31 will be considered as the cut-off for calculating your capital gains taxation.

However, any sales done and profits booked before March 31, 2018, are entirely exempt from LTCG tax.

Another point to be noted here is that unit-linked insurance plans (ULIPs) will not attract any tax since they are not classified as equity. However, it is not certain if it will lead to a shift in the preference for ULIPs. It is also not certain if the government may think of reclassifying ULIPs to fall under the purview of LTCG.

NPS exemption for the self-employed

This pertains to the contribution to the National Pension Scheme (NPS) where there is an additional exemption up to Rs. 50,000 pa (over and above the extant limit of Rs. 1.50 lakh available under Section 80C of the IT Act) for specific contributions like PPF, CPF, Life Insurance, long-term deposits, ELSS, tuition fees, principal on home loan, etc. This Union has been taken one step further in the Union Budget 2018.

So far, only salaried employees were allowed to withdraw up to 40% of their total accumulated corpus from the National Pension Scheme (NPS) at maturity or account closure without any tax implications. This facility has now been extended to non-salaried/self-employed persons too so as to give them a level playing field.

Lock-in period for Section 54EC bonds extended from three years to five years

Section 54EC is exclusively applicable to capital gains from property and land only and not to capital gains on other asset classes. Profits from the sale of real estate become tax-free if they are invested within six month in specified bonds under Section 54EC. The Union Budget has extended the lock-in period of investments in capital gain tax exemption bonds from three years to five years. This means that earlier you had to stay invested in the 54EC bonds for three years to get the tax break, but from now on your money will have to be locked in for five years to claim the exemption.

Now DDT imposed on equity funds too

Till now, the dividend distribution tax (DDT) was only applicable on debt funds and equity funds did not attract DDT. But effective Union Budget 2018, there will be a DDT of 10% on dividends distributed by an equity fund under its dividend plans. The effective DDT will be 11.648% (10% DDT + 12% surcharge + 4% Health & Education cess). The idea of imposing the DDT on equity funds is to put them at par with the capital gains tax of 10%.

DDT, which was applicable only to debt funds so far, will now apply to equity mutual funds as well. While dividends will remain tax-free in the hands of the investor, the fund house will have to pay 10% tax on income distributed to investors. Effectively, it will reduce the quantum of dividends in the hands of the investor. For example, if the equity fund declares a dividend of Rs. 10, then the investor will get only Rs. 8.8352 after deduction of DDT. While the investor does not directly pay this tax of his pocket, it still reduces the total dividend available to the investor.

This might be a good time for those who rely on dividends from equity funds as a form of income to review their investment strategy, since this tax will reduce the on-hand returns for investors if they choose the dividend option.

Key takeaways for planning your tax for FY2018-19

One of the basic rules of tax planning is to start early and be systematic. Don’t try to cluster your tax planning in the last minute as it can put a lot of pressure on investors to arrange liquidity.

Therefore, remember these six points while planning taxes for FY2018-19:

  • The impact of the Standard deduction of Rs. 40,000 is not likely to be significant on the overall tax liability. That is because the standard deduction comes in lieu of medical allowance and transport allowance. At higher income levels, the actual tax will be higher due to the impact of higher surcharge at 4% in FY2018-19.
  • Investors must be cautious about using the dividend option in equity funds due to the DDT of 10%, which is an additional cost and reduces your dividend income. As part of smart tax planning, investors can look at structuring their withdrawals in the form systematic withdrawal plans (SWPs) to reduce the impact of dividends tax.
  • The 10% LTCG tax on equities and equity funds does not make a case for ULIPs over ELSS. For tax planning, it is always better to keep your insurance and your investment products separate from one another. That also gels into the idea of financial planning using discrete products.
  • The LTCG tax on equity funds may appear to be too high if you consider 10% on the capital gains without the benefit of indexation. One needs to look at it in terms of the impact on the compounded annual growth rate (CAGR). Over longer periods of 15-20 years, the impact on the CAGR returns as a result of the LTCG tax is less than 50 basis points. Hence, long-term financial plans are unlikely to be overly impacted by the LTCG tax.
  • Make the best of the Section 80D benefits in the form of health cover for your family and your parents. At the peak level, the exemption can go as high as Rs1 lakh for medical insurance alone. This is a must with the rising cost of medical care and hospitalization. Moreover, this additional tax benefit also beings down your effective post-tax cost drastically.
  • The government has made it quite clear that defaults in filing returns will be dealt with sternly. Effective FY2018-19, there will be a penalty of Rs5,000 for delayed filing of returns and that will have to be paid before the delayed returns can be filed.
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