JOYDEEP GHOSH, TINESH BHASIN

& ASHLEY COUTINHO

The retail investor or consumerwill be confused after theUnion Budget 2015-16. While

there are no apparent tax benefits, interms of higher basic exemption lim-it, increasing tax slabs or even the 80Climit, the finance minister has told usthere are substantial benefits up to~4.44 lakh. Let’s look at some of theseand if they really work.

The Budget allows an additionalinvestment of ~50,000 in NPS.Should I invest in it?Tapati Ghose, tax partner, Deloitte,Haskins & Sells LLP, believes there isa case for the National PensionSystem (NPS) because of embeddedbenefits like investment in equities.But she believes changing the taxa-tion on NPS to an exempt-exempt-exempt (EEE) regime would havehelped matters substantially.

So, the tax benefit of investing~50,000 in NPS may not yield great ben-efits. Under the existing guidelines, NPSdoes not enjoy the EEE status. Instead,there is a tax (EET) on the final corpus,according to the tax bracket. On theother hand, the Employees’ ProvidentFund (EPF) enjoys EEE status in whichthe final corpus is not taxable. NPS,however, provides a higher return com-pared to EPF because of its exposure toequities. And it is an additional benefitover and above the 80C limit.

For the sake of simplicity, if we com-pare EPF and NPS returns, the lattersuffers from the tax blow. If one invests~50,000 in EPF and NPS for 10 and 20years respectively, considering the aver-age EPF returns of 8 per cent for thenext 10 and 20 years, the end corpus willbe ~7.24 lakh and ~22.88 lakh. In com-parison, if the returns from NPS are 10per cent for the same time period, thereturns will be ~7.96 lakh and ~28.63lakh. But due to taxation, these num-bers will come down substantially. Forexample, if the entire NPS corpus is

taxed at 30.9 per cent after 20 years, thevalue will be fall to ~19.78 lakh. Clearly,the investor is a loser if he uses the~50,000 limit for tax benefit for nowbecause investing this amount in anequity fund with even 10 per centreturns would give him better returnsand it is tax free as well (LTCG is zeroafter one year).

If the government gives the sametax treatment to NPS, then the investorwill gain immensely. Interestingly, thegovernment is pushing investmentsin NPS through tax benefits. But it hasalso indicated that it is discarding theDirect Taxes Code which had pro-posed NPS EEE status.

What does the tax benefit of~4,44,200 mean?This is a combination of different dedu-ctions an individual can claim from in-come. Taxpayers can claim ~1.5 lakh un-der Section 80C, then ~50,000 towardscontribution to NPS and health ins-urance deduction of ~25,000. Then, th-ere’s deduction of up to ~2 lakh on theinterest component of a housing loan forself-occupied property. Finally, trans-portation allowance has been raisedfrom ~9,600 a year to ~19,200.

“The figure looks big on paper. Theactual tax saving it translates (to) isminuscule,” says Kuldip Kumar, part-ner and leader Personal Tax, PwC India.Someone earning ~8 lakh a year andmaking use of all the deductions, willend up paying tax of ~31,065. Before theBudget, the liability would have workedout to ~47,462. This translates to an actu-al saving of ~16,398. For those earningabove ~1 crore, the tax outgo can mar-ginally rise due to the two per cent sur-charge.

If I withdraw from EPF before fiveyears, how will I be taxed? This will be applicable if the amountwithdrawn exceeds ~30,000. In casethe employee does not quote his PAN,tax deduction will be applicable at themaximum marginal rate. “The PF inc-ome is sometimes inadvertently miss-

ed out while filing tax returns. Withh-olding the tax will help in recognisingthis payment in the tax returns,” saysRajesh Srinivasan, partner, Deloitte,Haskins & Sells.

According to him, individualswhose annual income does notexceed the basic exemption limit of~2.5 lakh have the option to furnishForm 15H to their employers ask themnot to deduct TDS for PF payment.

How will service tax and SwachhBharat tax impact me?The Budget has introduced a SwachhBharat cess of two per cent, while serv-ice tax has been raised by 1.64 per centto 14 per cent. Accounting for the cess,the effective service tax would workout to 16 per cent. The overall rise inservice tax will make a dent in yourmonthly budget. Activities rangingfrom eating out, watching movies andtalking on the phone will cost more.

“It is not yet clear whether theSwachh Bharat cess will be applicableacross the board or include only selectservices. It will only be cleared once theFinance Bill gets passed in May,” saysSaloni Roy, senior director, Deloitte.

How to use the medical insurancebenefits?Buying medical insurance for self andfamily, especially senior citizens, willbe a lot more beneficial. “The pro-posed increase in premium deduc-tion under 80D for senior citizens is avery positive step which would entailthat senior citizens, especially those intheir retirement phase, will now beincentivised to buy adequate healthcovers commensurate with theincreasing costs of treatmentsincurred in their age band. The bestpart is that employees covered underEmployee’s State Insurance wouldhave an option to shift to health insur-ance which would open for them theentire range of hospitals with ultramodern facilities and ensure eventhey can avail the best treatment,”says Rakesh Jain, chief executive offi-

cer, Reliance General Insurance.Deduction for the medical health

insurance premium has been increasedto ~25,000 from the existing ~15,000.For senior citizens, it has been increasedfrom ~20,000 to ~30,000.

There are benefits for medical

expenses as well. The limit for claimingdeduction in respect of medical treat-ment of dependents with disability hasbeen increased to ~75,000 from ~50,000.For medical treatment of dependentswith severe disability, it has beenincreased to ~1.25 lakh from ~1 lakh.

Does the Budgetbenefit you?Tax liability Pre Post Additional

Budget Budget savings/tax

(All figures in ~)

If your annual income is above basic exemption limit but below ~5 lakh

5,00,000 5,00,000

A. Maximum deduction underSection 80CCD(1B) for contributionto National Pension System - 50,000

B. Maximum deduction under Section 80D* 35,000 55,000

C. Transport allowance** 9,600 19,200

Income chargeable to tax forNon-senior Citizens 4,55,400 3,75,800

Income chargeable to tax for seniorcitizens and super senior citizens*** 4,65,000 3,95,000

Tax payable

I Individuals below 60 years of age 22,145 14,935 7,210

II Senior citizens (resident individualsbetween the age of 60 years to 80 years) 30,900 30,900 -

III Super senior citizens (resident individualsabove 80 years of age) - - -

If your annual income is more than ~5 lakh but less than ~10 lakh

10,00,000 10,00,000

A. Maximum deduction under Section 80CCD(1B) for contribution to National Pension System - 50,000

B. Maximum deduction under Section 80D* 35,000 55,000

C. Transport allowance** 9,600 19,200

Income chargeable to tax fornon-senior citizens 9,55,400 8,75,800

Income chargeable to tax for seniorcitizens and super senior citizens*** 9,65,000 8,95,000

Tax payable

I Individuals below 60 years of age 1,21,540 1,07,120 14,420

II Senior citizens 82,400 82,400 -

III Super senior citizens 82,400 82,400 -

If your annual income is above ~10 lakh but less than ~1 crore

15,00,000 15,00,000

A. Maximum deduction underSection 80CCD(1B) for contribution to National Pension System - 50,000

B. Maximum deduction under Section 80D* 35,000 55,000

C. Transport allowance** 9,600 19,200

Income chargeable to tax forNon-senior citizens 14,55,400 13,75,800

Income chargeable to tax for seniorcitizens and super senior citizens*** 14,65,000 13,95,000

Tax payable

I Individuals below 60 years of age 2,72,435 2,50,805 21,630

II Senior citizens 1,85,400 1,85,400 -

III Super senior citizens 1,85,400 1,85,400 -

If your annual income is more than ~1 crore

1,50,00,000 1,50,00,000

A. Maximum deduction underSection 80CCD(1B) for contribution to National Pension System - 50,000

B. Maximum deduction under Section 80D* 35,000 55,000

C. Transport allowance** 9,600 19,200

Income chargeable to tax forNon-senior citizens 1,49,55,400 1,48,75,800

Income chargeable to tax for seniorcitizens and super senior citizens*** 1,49,65,000 1,48,95,000

Tax payable

I Individuals below 60 years of age 48,88,329 49,52,982 64,653

II Senior citizens 2,03,940 2,07,648 3,708

III Super senior citizens 2,03,940 2,07,648 3,708

* It is assumed that the parents of the Individual are senior citizens.** Deduction for transport allowance is allowed only in case of salaried individuals. ***For the purpose of above analysis, benefit of transport allowance is considered only in case of individualsbelow 60 years of age. Source: PwC

INCOME-TAX IMPACT ON INDIVIDUALSSome good things from a long-term savingsperspective, but these aren’t likely to putsubstantial cash in your hands

ILLUSTRATION BINAY SINHA