As is the practice each year, the Government presents its Finance Budget explaining how it plans its income & expenditure for the new financial year. The budget covers various financial and socio-economic aspects that affect the livelihood, basic necessities and quality of life of the citizens in terms of infrastructure, roads, transport, water, agriculture, productivity, employment, power, etc. To manage this, the government heavily depends on taxes and borrowings as it’s source of income. Naturally, there is this anxiety in the citizens whether the budget will bring in additional tax burdens. On the other hand, there is a huge expectation built up for a favourable tax regime, especially from the salaried class. After all, who would not want some extra money in their pockets?
Before we look into the details of this year’s budget (Financial Year 2018-19) and for the benefit of any new tax payers or payroll practitioners, let us quickly recap some benefits that salaried employees can avail in order to reduce their taxable income and thereby tax liability. The first option is to subscribe to tax-free allowances and the second is to invest in government-approved investment schemes, which would help in lowering the taxable income and in turn will bring down tax liability itself.
Simple tax computation method to remember
- Arrive at gross total income
- Reduce: Tax-free allowances
- Reduce: Investments made
- Arrive at net taxable income
- Apply appropriate tax rate
- Arrive at net tax liability
- Add: Surcharge on net tax liability
- Add: Health & Education cess on net tax liability
- Arrive at gross total tax liability
Let us now review the impact of this year’s budget on income tax. Apart from employees who would want clarity on the various tax nuances of the budget, it is necessary for payroll practitioners too to fully understand the same in order to calibrate their payroll system or for making changes to software configuration. Additionally, it is a good practice to clearly communicate such changes to the employees in order for them to fully understand its impact on their income and net pay. It is equally important to discuss the tax changes with internal stakeholders such as C&B, Finance, Tax or Legal Compliance teams, Auditors, etc for their awareness. These changes should be appropriately recorded in any payroll documentation with proper version control for future references.
In this year’s budget, the government has introduced a standard deduction of Rs 40,000 per annum for all sections of income earners, to be reduced from their taxable income. However, there were two popular allowances such as Medical allowance (upto Rs 15,000 p.a.) and Conveyance allowance (upto Rs 19,200 p.a.) which employees could have claimed as tax-free income until the previous financial year 2017-18. These allowances have now been withdrawn by the government.
This leaves with only a couple more significant tax-free allowances that employees can still claim as a part of their income. One is the House rent allowance (HRA) for those who stay in rented houses and are paying rent. The quantum of such allowance is generally limited to Actual rent paid minus 10% of Basic salary. The other one is Leave travel allowance (LTA) which can be claimed twice in a block of four calendar years. The fresh block of four years has just begun from January 2018 upto December 2021. The amount upto which an employee can claim as LTA is defined by each Company’s C&B team, which should be reasonable and align to market practices. There are additional allowances when a car or house is provided to certain categories of employees of an organisation but these are not fully tax-free but need to be declared as perquisites.
Other tax-free allowances that have not been changed are Uniform allowance, Meal Allowance, Children Education Allowance, etc. Since these allowances benefit only a few sections of employees, they have not been elaborated much here.
Similarly, the budget brought no significant change or addition this year to the investments that an employee can make to avail rebates in tax liability. The base investment of upto Rs 150,000 p.a. under section 80C and an additional investment upto Rs 50,000 p.a. in National Pension Scheme remains unchanged. However, there is an increase in medical insurance premium paid under section 80D from Rs 30,000 to Rs 50,000 for each parent who is a senior citizen (=>60 years). Also, actual medical expenditure of upto Rs 30,000 for both senior and/or super senior citizens (=>80 years) is now allowed to be claimed as deduction. Likewise, the medical expenditure for coverage of specified diseases for senior citizens as well as super senior citizens have been enhanced to Rs 100,000 p.a.
The rates of surcharge have not been changed and remain at 10% on tax liability for income greater than Rs 50 Lakhs upto Rs 1 Crore and 15% for income greater than Rs 1 Crore. However, the Health & Education Cess has been increased by a percent from the current 3% to 4% on tax liability for all types of income earners.
With the above changes to the tax guidelines, the tax forms will obviously change too to incorporate them. As mentioned, all these changes will require the payroll team to make appropriate amendments in their respective systems or software and templates. The employee self-service portal will have to undergo changes to remove medical and conveyance allowance from the list of allowances, enhance the limits under sections 80D and 80DDB, while the tax calculator will need to include standard deductions.
Remember, adherence to statutory matters is mandatory and there are no two ways about it. Any error in configuration or formula can be disastrous especially in organisations where there are medium to large number of employees.
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