Impact of Budget 2016 on Salaried Class

Just less than 3 % of Indian population bears the total income tax burden of the country. Out of these 3.25 Crore people, 89% pay taxes in the tax slab of 0 – 5 Lakh. Salaried class bears most of the tax burden as tax is deducted at source by the employer. The impact of budget 2016 on this class is as follows:

In Budget 2016, the finance minister has increased the deduction limit of rent paid under section 80GG from Rs 24000 to Rs 60,000 p.a. A salaried employee who does not receive HRA as a part of his salary or self-employed assesses makes use of this deduction on account of payment of rent. It will save additional tax of Rs 3,708 to Rs.11,124 if they fall under 10% to 30% tax bracket. Currently, salaried individuals who receive HRA as part of salary and claiming deduction under section 10 of rent paid from salary income are not affected by this proposed change in tax law.

The finance minister has also increased the tax rebate given to individuals having taxable income equal to or less than Rs 5 lakh under section 87A from Rs 2000 to Rs 5000. This will benefit 2 crore small tax payers and will provide a relief of Rs 3090 in tax

Buying first house will now give an additional Rs 50,000 tax deduction under section 80EE  for interest paid if new house is acquired  in 2016-17, provided loan amount is not more than Rs. 35 lakhs and property value is not more than Rs 50 lakhs.First house borrowed with a home loan will give multiple tax benefits. These deductions not only reduce tax burden but also help in managing your cash flows .Tax advantage on Home Loan can be divided into three components:

1. Deduction available under Section 80C for Principal amount repaid.
2. Deduction available under Section 24(b) for Interest payment up toRs 2,00,000
3. Additional Deduction available under Section 80EE of Rs.50,000 in 2016-2017  as announced in budget 2016

No changes in tax slabs or increase in any deductions or exemption limits and this is a step towards widening the tax base by bringing more people under the tax net. Even after 68 years of Independence, no substantial steps have been taken to increase the tax net/base.

The budget proposes to partially tax EPF withdrawals. There was a lot of noise against this move of the government which will affect nearly 20% of salaried class. The principal amount will remain exempted and  60% of the interest earned on made after 1st April will be taxed at the time of withdrawal. The employees with wage limit of less than Rs.15000 per month , will not be affected by this new proposal. Public provident fund (PPF) will continue to be exempted. 40% of the NPS corpus will be tax free .The motive behind this is to increase its attractiveness from other retirement products.

Extension of time period from 3 to 5 years for availing Rs.2 lakh deduction has been one of the major demands of the real estate sector and is a good move as it will allow more people to avail the entire deductions. Earlier, for claiming deduction of Rs. 2 lakh a borrower had to complete the possession/construction of the house property within 3 years of taking the home loan, failing which the borrower could claim a deduction of only Rs.30000. Most of the developers failed to deliver the project within 3 years, as a result borrowers were not able to avail the deduction of Rs.2 lakh under section 24(b).

Dr. Ashok Sharma

Associate Professor

Department of Management Studies