Personal income tax and the budget effect

                                 (This article has been published in Finsight- February 2017) 

Personal income tax has been a major area of tinkering in budgets historically. This time too, expectations were high and multi-faceted: ideas of increasing thresholds, reducing slabs, bringing part of agricultural income into the net and imposing long-term capital gains on equities were doing the rounds.

Compared to expectations, the changes in Budget 2017 were modest and fiscally prudent with no major giveaways. There’s been a bit of the Finance Minister’s trademark Robin hood strategy of minimizing the tax liability for brackets to 5% (for taxable income between Rs.2.5 lakh – Rs.5 lakh) and partially offsetting it through an additional surcharge levy on high income earners – 10% of tax liability, for an annual taxable income from Rs.50 lakh to Rs.1 crore.

Following is an illustration of how your tax liability computes for different levels of income under the new taxation regime:

Possibly to avoid shaking the boat further on an economy recovering from demonetization and bracing for GST, the Finance Minister has avoided other radical moves on agricultural income and capital gains. However, he has wisely avoided narrowing the tax base further by increasing thresholds – he has instead opted to reduce the lowest slab rate to 5% and provide relief.

There have been a few tactical moved – interest on all home loans is deductible only to the extent of Rs 2 lakh per year. The time horizon for treating gains on property as long term is now two years instead of three. But on the whole, it’s been an incremental and stable personal tax regime from the budget.

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