Middle Class In A Squeeze Again

Anita salonkar is a worried woman. With barely five years left to go, the new Budget proposals concerning the Employee Provident Fund (EPF) have thrown a spanner in the wheels of her husband’s retirement plans. He was banking on his substantial provident fund to purchase a plot in Kochi, Kerala, for them to sit out his retirement years. Now, they would have to eke out those years. Because the proposals would actually compel him to invest more for a decent annual income. He doesn’t need that. He already has a pension plan.

The 53-year-old Rajesh Salonkar has been judiciously keeping his provident fund untouched. Despite the numerous occasions when he had needed extra funds, he kept his fingers off his EPF. “It’s sacrosanct and I am regularly keeping it updated, because I think it’s safe with the government,” says the salt-and-pepper haired man. “I am really unhappy with this move; I don’t like that my plans have be altered just when I am thinking of retiring.”

Salonkar does not have a Plan B to fall back on for fulfilling their dreams. He now wishes he had made additional investment choices rather than banking on just one investment avenue for his long-term plans. “I just wish that I had also created an alternative plan so that we get what we want when I retire,” he says.

Thousands of salaried employees are facing the grim prospects of radical changes in their retirement plans; the Budget now places the onus on individuals to purchase annuities or pay tax on their EPF withdrawals to the extent of 60 per cent of the corpus at the time of retirement.

Individuals who buy annuity products will not face a tax incidence on 60 per cent of EPF withdrawals; however, the annuity income will be subject to tax when received.

The move has been introduced to equate provident funds with the existing National Pension Scheme NPS), which has similar provisions introduced this year. This Budget has made withdrawal at the time of retirement up to 40 per cent exempt of tax. This brings the NPS scheme on par with provident funds. Many government employees are quite pleased with the move.

While the government has clarified that only the interest accrued portion would be taxed in the case of EPF, many salaried individuals are greatly disheartened with the move. Says Kuldip Kumar, leader, personal tax, Pricewaterhouse Coopers India: “The EPF withdrawal tax is generating huge resentment among employees; this is not something salaried individuals were anticipating.”

A final clarification regarding how the complete tax calculation will be made has yet to be issued, even as there are demands from trade unions and millions of tax payers that the government withdraw this proposed amendment. (In view of the huge resentment sensed, the government is already considering scrapping this proposal.)

Nevertheless, this signals one thing for almost all individuals. You ought to fend for yourself and create multiple avenues of investment. As matters stand today, there could be changes in your plans that could see them derailed due to alterations in the tax laws.

The new Budget tax proposals have also disappointed the ultra-rich. On income exceeding Rs 1 crore,the surcharge has been raised from 12 per cent to 15 per cent from the next financial year. This would step up the tax liability for the rich — from the present 34.61 per cent, including surcharge, to 35.54 per cent.

These tax proposals will put a significant dent in their incomes. Says Kumar: “The ultra-rich are paying 75 per cent in taxes, while they constitute just a handful, about seven lakh assessees. They should get some additional recognition so it makes them happy to pay these taxes.”

Of course, there have been other proposals that benefit the tax payers such as an electronic audit of returns (now implemented on a pilot basis)which would reduce hassles for many individuals whenever scrutiny follows.

The Budget has also proposed several amendments to reduce fruitless litigation by instituting a Direct-Tax Dispute-Resolution Scheme, 2016. This would permit tax payers whose appeals are pending before the first appellate authority to pay tax and interest up to the date of assessment in case of tax disputes of up to Rs 10 lakh. Says Kumar: “The government has given these windows to resolve such disputes quickly and amicably, without the long-drawn-out cost of litigation.” Experts also point out that this is a good opportunity for individuals to resolve tax disputes, if any.

What’s more, the proposals have allowed for those who have not paid taxes in the past to come clean and ensure compliance by paying 45 percent of the undeclared income as tax and penalty. As a result, individuals will not be subject to further interest, penalty or prosecution. The scheme is open from June to September 2016, subject to specified conditions.

While middle-class individuals have been expecting the tax slabs to be raised (and expanded) to counter-balance the higher cost of living, the Budget has raised them for only a select few in the lowest tax bracket. The tax rebate of Rs 5,000 would be available to small tax payers under Section 87A, against Rs 2,000 earlier. This would offer relief to about two crore tax payers.

For all other individuals, there has been no change in tax slabs.

For individuals banking on dividends for income, the Budget has proposed to tax them if dividend exceeds Rs 10 lakh, and Hindu Undivided Family at 10 per cent on a gross basis. So if you have sizeable income from dividends or if they form a part of your retirement income (as with most retirees), your tax incidence will rise.

The other major relief most individuals needed was a higher exemption limit for investments. The Budget did not offer that. Under section 80C, the limit stands the same, at Rs 1.5 lakh, the investments made in provident funds, equity-linked savings schemes, insurance premiums, etc.
If you don’t have a roof over your head, there’s an additional deduction of Rs 50,000 on home-loan-interest payments to encourage you to buy a house. The deduction is available on loans up to Rs 35 lakh sanctioned in 2016-17 for first-time home buyers, but the value of the house property should not exceed Rs 50 lakh.

Overall, this would see a reduction of Rs 2.5 lakh in your interest cost: the interest paid of Rs 2 lakh would be available for deduction under Section 24 (b), the balance Rs 50,000 under Section 80EE, of the Income Tax Act.

A great relief has also been provided for individuals who are constructing houses, but have not yet received possession since most builders prolong deliveries on their housing commitments. The Budget has increased the time limit of completion of construction from three years to five years for property that would be self-occupied.

Besides, for those who have transferable employment, the deduction under Section 80GG has been increased from Rs 24,000 to Rs 60,000 a year on payment toward house rent. This provision is meant for those individuals who do not get house-rent allowance from their employers, and duly recognises the vastly increased cost of housing (and rentals). If you fall under this category, your tax bill has just been slashed.

But for most individuals, there’s hardly any relief. The lower income-tax payer has benefited to some extent, while the government has increased taxes on the rich.

One good thing is that the government has left the long-term capital-gains tax on equity investments untouched. The law-makers have proposed easing disputes regarding classification of this, whether as long-term capital gains or business income. This should come as a welcome relief for many individuals who invest regularly in the equity markets, and have many transactions to report.

Once individuals classify their investments as long-term or business investments, they are not allowed to change the classification. Here, of course, experts advise that you should normally classify your investments for tax purposes as long term or short term.

If you are among the majority of tax payers, chances are that your tax on current income will be the same, leaving almost no additional income in your hands. Some of your retirement plans will be changed (with the tax on EPF), but, depending on how you are placed on the EPF level, you could also include plans to fund your future with equity-linked savings schemes of mutual funds. Contributing to EPF is optional over income of Rs 16,500.

You could also look at tax-free bonds for some retirement income, which may be lower but the corpus still holds, and top-up your Public Provident Fund account to the fullest because that remains tax-free and can well substitute for the EPF.

You also have to adjust to the fact that there are no reduced taxes on various income slabs, so maximise your tax deductions if you have not fully availed of them. By and large, the lawmakers have left most middle-class salaried employees untouched. So, there’s little left for you to do except probably squeeze out some more savings to fund the extra tax outgo when you retire.

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