A calculator sits on the desk of CPA Mike Dyer as he prepares federal income tax returns for clients at Tax Pros USA in La Grange, Kentucky, U.S. (Photographer: Luke Sharrett/Bloomberg)

Budget 2019: Government Proposes Income Tax Breaks For The Middle Class Ahead Of Elections

Finance Minister Piyush Goyal announced tax breaks as the Narendra Modi administration looks to woo India’s salaried middle class ahead of the upcoming general elections.

Individual taxpayers having a taxable annual income up to Rs 5 lakh will get full tax rebate, Goyal said during his union budget speech in Parliament. The finance minister said that the tax proposals will be presented in full budget after the elections. The existing rates will continue for 2019-20.

Small taxpayers especially the middle class, salary earners and senior citizens need certainty in their minds at the beginning of the year about taxes. Therefore proposal relating to such class of persons should not wait.
Finance Minister Piyush Goyal

The salaried taxpayer remains a key voting bloc for Modi as he plans to get re-elected in the face of a strengthening opposition. The number of such taxpayers stood at 2.3 crore in 2016-17, according to data released by the Central Board of Direct Taxes.

While the tax slabs remain the same, the rebate on income tax has been raised from Rs 2,500 to Rs 12,500. So, an individual with a taxable income of more than Rs 5 lakh in a year will continue to pay 5 percent on the taxable income between Rs 2.5 lakh and Rs 5 lakh.

The finance minister also raised the standard deduction for salaried individuals to Rs 50,000 from Rs 40,000. In the previous budget, this standard deduction was introduced instead of tax-free transport and medical allowance worth Rs 34,200.

There’s no change in other deductions. According to Goyal, use of these deductions and investments in specified savings would mean that most people with a gross income of up to Rs 6.5 lakh may not have to pay tax.

“I think it is an excellent budget for the middle class, the pensioners and the small taxpayers,” said Homi Mistry, partner at Deloitte India. “There was an expectation that exemption would go up from Rs 2.5 to 3 lakh per annum. But he has actually doubled it.”

Mistry illustrated the extent to which taxpayers can now save money. “Let us consider a person earning a salary of Rs 7 lakh a year. He gets a standard deduction of Rs 50,000. So he will have a gross income of Rs 6.5 lakh. And if he invests another Rs 1.5 lakh in provident fund, PPFs, life insurance, etc., he won’t end up paying any tax at all.”

Another change that will benefit pensioners and others is that there won’t be any tax on interest income of up to Rs 40,000—the earlier threshold was Rs 10,000.

“This means that the government wants to simplify the process for those who earn high interest income, but low total income,” said Arvind Rao, founder of Arvind Rao & Associates. “So, if they earn less than Rs 40,000 in interest on deposits, and they don’t fall in the minimum taxable bracket, they won’t have to file a return.”

LTCG On Property

In a relief to those seeking to sell real estate, the finance minister announced that the long-term capital gains tax arising out of the sale of a property up to Rs 2 crore could be used to buy two properties.

Currently, individuals can only reduce their long-term capital gains on sale of property by buying a single house. The caveat here is that an individual can only claim this extended benefit once in their lifetime.

“It is a very practical thing to do,” said Keki Mistry, vice chairman and chief executive officer at mortgage lender HDFC Ltd. “In many Indian families, for example, when the parents sell a house and they want to buy two apartments—one for their children and one for themselves to live in. So if you give LTCG exemption for buying two apartments, it increases the demand for houses. Instead of one unit getting sold, there are now two units getting sold.”

Even though one more house property can be claimed as an exemption, the total deduction on loss from house property remains same as Rs 2 lakh.

Here are the other tax relief measures:

  • With additional deductions such as on home loans, persons with even higher income will not have to pay tax.
  • Total tax benefit of Rs 18,500 crore to an estimated 3 crore taxpayers.
  • For salaried persons, standard deduction raised from Rs 40,000 to Rs 50,000 per annum.
  • Exempt levy of income tax on notional rent for second self-occupied house.
  • Tax deducted at source threshold on interest earned on bank/post office deposits to be raised from Rs 10,000 to Rs 40,000.
  • TDS threshold on rent to be raised to Rs 2.4 lakh.
  • Affordable housing tax benefit extended for one more year.

Existing Tax Slabs

Budget 2019: Government Proposes Income Tax Breaks For The Middle Class Ahead Of Elections