Taxing times for the rich

In the 2013-14 Union Budget, the then finance minister P Chidambaram, for the first time, coined and defined India’s super rich — a person with an income of over Rs 1 crore. And, he imposed a surcharge of 10 per cent on these individuals.
 
Four years later, Finance Minister Arun Jaitley, has created a new segment of taxpayers in the Union Budget 2017-18 — the rich — ones with income of Rs 50 lakh-1 crore and imposed a surcharge of 10 per cent. Taxpayers with income of Rs 1 crore and more, currently, pay a surcharge of 15 per cent. That’s not all. There are several other measures targeting high-value properties, purportedly, targeting the same segment who participate in the property market as investors or own more than one property.
 

The Union Budget, coming against the backdrop of demonetisation and global worries, was expected to dole out benefits for rejuvenating the investment climate and creating jobs. However, from the personal taxation or savings perspective, the finance minister has followed a simple principle — take from the rich and super rich and give it to the not-so-well-off.
 
So, taxpayers with income above Rs 50 lakh to Rs 1 crore will feel the pinch while those in all other income brackets will benefit.
 
New surcharge: The surcharge of 10 per cent will result in much higher tax outgo for people in this income bracket. For someone with an income of Rs 60 lakh, the tax outgo will rise by Rs 1.53 lakh next year; for someone with an income of Rs 1 crore, it will be Rs 2.77 lakh higher.
 
People with income marginally above Rs 50 lakh can take a few steps to reduce their taxable income and avoid paying the surcharge. They can get their employer to restructure their salary and contribute up to 10 per cent of salary to National Pension Scheme (NPS). Employer’s contribution up to this limit is tax deductible. They can also make full use of all the deductions available: Sections 80C, 80D, Section 80CCD, Section 24 and Section 80G. They should also try to reduce interest income, which is taxable.
 
They should also invest more in instruments which generate tax-free gains (Public Provident Fund, Employees’ Provident Fund, equities, and tax-free bonds).  
 
Home loan benefit capped: Currently, if an individual has a self-occupied property (SOP), he pays no tax under Section 23 of the Income Tax Act. Deduction on home loan interest is allowed up to Rs 2 lakh per annum on such property under Section 24. If a property is let out (LO) or deemed to be let out property (DLOP), the entire rent or notional rent is taxable under Section 23. The full interest payment is allowed from the same as deduction. If the net result of computation of income is a loss (i.e. if there is only SOP or the rent/notional rent is lower than the interest payment etc.), such loss could be set off fully from any other income of the taxpayer. The Finance Bill 2017 proposes to restrict such set off of house property loss to Rs 2 lakh per annum only. Balance loss, if any, will be carried forward to be set off against house property income of subsequent eight years. “Individual taxpayers having loss of more than Rs 2 lakh will now have a higher tax outgo,” says Parizad Sirwalla, partner and head of global mobility services, KPMG in India. According to Prateek Pant, head of products and solutions, Sanctum Wealth Management: “Beyond the basic exemption and deductions available to everyone, this was a significant tax benefit for people in the higher tax brackets. Its removal is a major setback.”
 
An example will explain this issue well. Suppose you have a property that is not self-occupied, which generates rent of Rs 3 lakh a year. The interest on your home loan is Rs 8 lakh a year. When you reduce the interest from the rent, you generate a loss of Rs 5 lakh. This loss could be adjusted against any other income earlier. From next year, you will be able to set off only Rs 2 lakh each year. You will be allowed to carry forward the balance Rs 3 lakh for the next eight years. “There are two issues here. A limit has been imposed on the loss that can be set off. Moreover, the balance that gets carried forward can only be set off against rental income and not against any income,” says Arvind Rao, financial planner and founder, Arvind Rao & Associates. People with high interest burden will not be able to enjoy deduction on the entire amount even after carrying it forward, say experts.
 
Hereafter, it may be wiser to invest in a second house with your own funds. “Leveraged purchases don’t make much sense now that the tax benefit is gone,” says Rao. Alternatively, restrict the loan amount.
 
TDS on rent: The Budget has imposed an additional compliance burden on those who pay more than Rs 50,000 as rent per month. They will have to deduct TDS (tax deducted at source) of 5 per cent of annual rent and deposit it. If the tenant fails to pay TDS he can be penalised. “For salaried employees, under-declaring the rent will not help since they will lose out on House Rent Allowance,” says Rao.  
 
Tax on dividends: High-income earners who invest in equities are already taxed at 10 per cent if their dividend income is Rs 10 lakh or more. After this provision was introduced last year, many people opted to transfer their stocks into a family trust, which didn’t attract the tax. This year the finance minister has proposed to tax trusts too, unless they are charitable or religious in character. Tax experts say that while the trust will continue to be a preferred structure, it will be less tax efficient in future.
 
Promoters will be worse hit than the salaried by this move. According to Jiger Saiya, partner-direct tax, BDO India, “A promoter already pays corporate tax of around 30 per cent on his company’s income. There’s also a dividend distribution tax of around 20 per cent. Now, there’s an additional tax of 10 per cent on dividends received.”
 
The effective tax rate for promoters owning shares either in person or through Hindu Undivided Family or private trusts will work out to over 36 per cent.