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Sunday, March 04, 2007

Finance Bill 2007 and personal taxation



What changes are proposed relating to the rates of taxation?

While the rates of income-tax are not proposed to be changed, there is a new levy, the secondary and higher education cess, which would be 1 per cent of the tax and surcharge.

This cess will be computed only on the tax and surcharge and will not include the additional surcharge, which 2 per cent now. This will apply to all assessees. In the case of individuals and HUFs (Hindu undivided family) the basic exemption has been raised by Rs10,000. The tax rates for various slabs will be as in the table.

It is also proposed to amend the provisions of Section 115O to provide for a tax on distributed profits at 15 per cent against 12.5 per cent now. It is proposed to amend Section 115R to provide for tax on distributed income on mutual funds to be computed as follows:

25 per cent on income distributed by a money market mutual fund or liquid fund

12.5 per cent on income distributed by a fund other than a money market mutual fund or liquid fund if the distribution is to an individual or HUF.

20 per cent on income distributed by a fund other than a money market mutual fund or liquid fund if the distribution is to any other person.

The term money market mutual fund is proposed to be defined to mean a money market mutual fund as defined in Section 2(p) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and a liquid fund is proposed to be defined to mean a scheme or plan of a mutual fund which is classified by SEBI as a liquid fund in accordance by the guidelines issued by it in this behalf under the SEBI Act, 1992 or the regulations made there under.

Are there any new assets which will be charged to capital gains on transfer?

To bring within the ambit of capital gains certain personal effects, an amendment is proposed to Section 2(47) to exclude from the definition of the term personal assets, archaeological collections, drawings, paintings, sculptures or any work of art, which would mean that the transfer of these assets would be chargeable to capital gains.

What are the changes proposed with regard to making investments in bonds for claiming exemption in respect of long-term capital gains?

Section 54EC of the Income-Tax Act, 1961 provides tax exemption on capital gains arising from the transfer of a long-term capital asset to the extent such capital gains are invested in `long-term specified assets' within six months from the date of such transfer. The Finance Act, 2006 amended the definition of long-term specified assets so as to mean any bond redeemable after three years and issued on or after April 1, 2006 by the National Highways Authority of India and Rural Electrification Corporation Limited. Such bonds had to be notified by the Central Government in the Official Gazette.

It is proposed to amend the said Section, by substituting the existing clause (b) of explanation, so as to provide that the Central Government, while notifying such bonds in the Official Gazette may lay down in the notification such conditions, including for providing a limit on the amount of investment by an assessee in such bonds, as it thinks fit. This amendment will take effect retrospectively from April 1, 2006. The proposed amendment seeks to regularise the condition stipulated in Notification S.O.2146(E) December 22, 2006, where it was provided that the investment cannot exceed a sum of Rs50 lakh.

It is also proposed to amend the section so as to provide for a ceiling on investment by an assessee in such long-term specified assets.

Investments in such specified assets to get exemption under Section 54EC, on or after April 1, 2007 cannot exceed Rs 50 lakh in a financial year.

What are the changes proposed on allowing deduction for health insurance premium? Will the deduction be allowed if the payment is made by credit card?

Section 80D provides that in computing the total income of an assessee, being an individual or a HUF, the sum paid by cheque to effect or to keep in force an insurance on the health of the assessee or on the health of any member of the family shall be allowed as a deduction.

The maximum amount allowed as deduction is Rs 10,000. In the case of senior citizens, the deduction allowed is Rs 15,000. Similarly, Section 36(1)(ib) provides for a deduction of the amount of any premium paid by cheque by the assessee, as an employer, to effect or to keep in force an insurance on the health of his employees under a scheme framed by General Insurance Corporation formed under Section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government or by any other insurer and approved by the Insurance Regulatory and Development Authority established under Section 3(1) of the Insurance Regulatory and Development Authority Act, 1999.

To allow deduction for payments made through electronic mode, credit card, etc., it is proposed to amend the provisions of Section 80D and Section 36(1)(ib) so as to provide that the payment of premium made by any mode other than cash, shall be eligible for deduction under these sections. It is also proposed to increase the maximum amount allowable under Section 80D, from Rs 10,000 to Rs 15,000. In the case of senior citizens, it is proposed to increase the limit from Rs 15,000 to Rs 20,000.

Can interest on loan taken for the benefit of relatives education be claimed as deduction?

Section 80E provides for a deduction, from the gross total income of an individual, of the amount paid by him by way of interest on loan taken from any financial institution or approved charitable institution for the purpose of pursuing higher education.

The deduction is available for eight assessment years beginning from the assessment year in which the payment of interest on the loan begins and is available only when the loan is taken for the higher education of the individual.

It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of the individual, the spouse and children.

Is there a proposal to increase the threshold limit for tax deduction at source in respect of interest?

The existing Section 194A(3)(i) provides that deduction of income-tax at source shall not be made in a case where the amount of income by way of interest other than "Interest on securities" does not exceed Rs 5,000.

The amendment proposes that the limit for deduction of tax at source under the aforesaid Section shall be Rs 10,000 where the payer is a banking company or a co-operative society engaged in carrying on the business of banking or a post-office in respect of notified schemes. In other cases, the threshold limit is to be retained at Rs 5,000.

These amendments are proposed to be effective from June 1, 2007.