What budget 2016 entails for salaried middle class

Mumbai: Budget 2016 managed to live up to our expectations as far as maintaining fiscal consolidation and development of rural sector is concerned. However, it proved to be mixed bag for the middle class. While the proposed deduction of Rs 50,000 for interest paid on home loans is in their favor, the government’s decision to partially tax EPF and other recognized provident funds can be seen as a stumbling block on the path of salaried class. Although this was done with an intention to rationalize tax treatments of various pension products, it had left people high and dry.

Here are some of our views about the announcements made in this year’s budget and that somewhere missed the bus.

Rationalization of pension plans:

This year’s budget has been good to NPS. While the government didn’t completely concede with PFRDA’s demands to make NPS tax-free, it has managed to bring this product at par with other pension plans by exempting tax on withdrawals up to 40 per cent on NPS, as well as by making other recognized provident funds such as EPF partially taxable.

The government’s decision to partially tax withdrawals on super-annuation fund and recognized provident funds, including EPFis deemed to affect the salaried class.This year’s budget proposes to tax 60 per cent of the interest accrued on contributions made after 1^st April 2016. The principal amount will not be taxed and will continue to remain tax exempt on withdrawal. Also, this 60 per cent can be tax exempt if it is invested in pension annuity schemes.

This proposal will particularly hit hard the salaried classes who have to mandatorily contribute a part of their salary to the EPF corpus.  As India does not have a social security system in place, the government should have instead brought NPS under EEE regime and left EPF untouched. That would have encouraged people to plan for their post-retirement life.

Additional deduction on interest paid on home loans:

A welcome move in this year’s budget has been the proposal to provide an additional deduction of Rs.50000 for interest paid on home loans, over and above the Rs 2 lakh deduction available under Section 24b. This additional deduction will only be available to first time home buyers availing home loans of Rs 35 lakhs or less, with a valuation of Rs 50 lakh or less. This will provide some relief to the home loan borrowers from middle class and infuse much-needed demand in the housing sector. Keeping in mind the interest of lower-middle class segments and economically weaker sections, this year’s budget has also waived off service tax payable on purchasing homes measuring less than 60 square feet.

While these two steps put together can be seen as a stimulus for increasing the housing construction activity, particularly in the affordable housing segment, the proposed deduction may not benefit people residing in metro cities, such as Delhi and Mumbai, given their high property prices.

Increasing tax deduction on house rent:

The proposal to increase the tax deduction (under Section 80GG) on house rent paid from Rs 24000 to Rs 60000 will benefit self-employed people and those employees who do not receive HRA as part of their salary component. While this proposal will give the self-employed classes a reason to cheer, the salaried class will not benefit much as most of them already receive HRA as part of their salary and hence, become ineligible to avail this deduction.

Tax rebate for those with income lesser than Rs 5 lakh per annum:

This year’s budget increased the tax rebate available to individuals with net income of Rs 5 lakh or less under Section 87A from Rs 2,000 to Rs 5,000. If we go by what the government states, this increased rebate will benefit more than 2 crore tax payers. 
 

Getting more out of super-rich:

The super-rich with annual net income of Rs 1 crore and above will have to shell our more as surcharge on income tax. This has been raised from 12 per cent to 15 per cent. Also, you will have to pay tax to the tune of 10 per cent of the gross dividend in case you get dividend of more than Rs 10 lakh a year.

A major disappointment for me from this budget would be non-inclusion of pension plans from mutual funds and insurance companies under Section 80CCD (1B). Currently, Section 80CCD (1B) allows you to avail an additional deduction of Rs 50,000 for investing in NPS. This deduction is over and above the deduction of Rs 1.5 lakh, available under Section 80C. As the main objective of this section is to encourage retirement planning and increase the pension coverage in India, bringing the pension schemes from mutual funds and insurance companies under this section would have induced competition in pension fund industry and led to increased pension coverage.

To sum it up, although this budget has somewhat tried to ease the financial pressure on lower middle class and economically weaker sections, a step like imposing taxes on 60 per cent of EPF maturity amount has been particularly harsh on salaried people, who have to mandatorily contribute a sizeable portion of their salary towards EPF. Increasing the taxes for people in their post-retirement life may work in contrary to the overall objective of providing social security to senior citizens.

(The author of the article is Naveen Kukreja, CEO & Co-founder of Paisabazaar.com)