Written in : March 1999

Part B of the Budget Speech of the Finance Minister contains his tax proposals. The FM, this time, skipped many a detail of the tax proposals. There is much in the fine print which we deserve to understand.

The FM has left the tax rates where they were. However, he has levied a surcharge of 10% on the tax payable, in case your income is above Rs.60,000. That is, if your income is more than Rs.60,000, you calculate tax at the rates applicable to you in the old way and pay 10% more toward surcharge. The surcharge, if you notice, is applicable on your total tax. Thus, effectively, the tax rates are:

• if your income is Rs.50,001 to Rs.60,000 - 10% - which is Rs.1,000.
• if your income is Rs.60,001 to Rs.1,50,000 - Rs.1,100 plus 22% of the balance;
• if your income is more than Rs.1,50,001 to - Rs.20,900 plus 33% of the balance;

However, in case of firms and companies, the surcharge will be applicable on all incomes.

UTI has been in some trouble this year on account of its US64 Scheme and doubts about its viability. The government has now proposed a bail out package primarily aimed at UTI but encompassing all mutual funds. It is now proposed that all income received by you from UTI or from a Mutual Fund would be exempt, just like dividends are exempt in your hands. UTI and mutual funds will, however, pay tax at 10% on income distributed by them to their members. There is also a special exemption from such taxes to UTI for its US64 Scheme and other open-ended equity oriented schemes of UTI and other mutual funds. They will not pay this flat tax of 10% for three years from April 1, 1999. This is good news for investors and mutual funds. This is sure to make mutual funds quite attractive investment opportunities. You will be seeing much action from them.

Long term capital gains are currently taxed at 20% after giving the benefit of cost inflation index. However, non resident Indians pay tax at 10% on long term capital gains on securities. However, the benefit of cost inflation index is not available to them. It is now proposed that if you have capital gains on sale of listed securities, you would pay tax at 10% on your capital gains. However, the benefit of cost inflation index shall be limited to your tax being 10% of capital gains and no more.

Thus, where you are unlikely to get much of indexation benefit, the new proposal will save you tax - as high as 10%. Quite attractive.

Company Law now allows companies to buy back its own shares. Many companies are likely to buy back their shares. Questions have arisen about tax consequences on buy back. Law was not very clear. The government has now come out with amendments to law so as to avoid litigation.

The proposals in the Budget now make it clear that any payment received by you on your shares being bought back by the company will not be dividends in your hands. It is also proposed that any amount received by you on buy back of your shares or other securities by a company would lead to a charge of capital gains in your hands.

It is unusual, and welcome, for government to come out with clarificatory amendments before avoidable litigation starts.

If you have borrowed loans for purchase or construction of a house for your own occupation, you were entitled to a deduction of interest of upto Rs.30,000 per annum. The Budget proposes to enhance this limit to Rs.75,000 if the loan is taken for constructing or acquiring a residential unit on or after 1.4.99 and the construction of the residential unit out of such loan has been completed before 1.4.2001.

This is a big tax break.

Currently, a deduction of Rs.15,000 is allowed in the computation of total income of an individual suffering from chronic and protracted diseases and terminal ailments or to any individual or HUF, on whom such individual is dependant. This limit is now proposed to be enhanced to Rs.40,000. The limit will be Rs.60,000 for senior citizens. The deduction will be net of any medical insurance benefits received.

Senior citizens are also entitled to a higher medical insurance premia deduction, of upto Rs.15,000 as against Rs.10,000 for others. I shall look into other interesting tax proposals in the next article.