Budget 2019 was widely expected to announce major tax-reliefs for the middle class. As it happened, budget proposals like increased tax rebates, notional rent exemption for second home, increase in standard deduction, etc succeeded in cheering up the middle class. On the other hand, Budget fell short on removing LTCG exemption on equities and equity mutual funds and providing tax reliefs to the first-time buyers of affordable housing.
Here are the major hits and misses of this year’s Budget for the middle class:
Hits: Increased tax rebate and standard deduction will boost consumption and investments:
India has registered a steady increase in income tax collections and widening of the tax base over the last few years, taking it towards a high compliance, moderate tax regime. Budget 2019 proposed to pass on some of the benefits of higher tax compliance to middle class taxpayers in the form of increased tax rebate and standard deduction. Taxpayers with taxable income of up to Rs 5 lakh will get 100 percent tax rebate on their tax liability whereas standard deduction has been increased from Rs 40,000 to Rs 50,000. These tax reliefs will result in higher disposable income for the middle class, which can be expected to boost their consumption and investments.
Increases in notional rent exemption and capital gains roll will benefit homeowners:
Homeowners with two or more residential properties have to declare a notional rent from their second home onwards even if those properties are occupied by family members or remain vacant. This increased their taxable income even when the notional income was not earned. Budget 2019 proposed to exempt the notional rent from the second self-occupied house even when taxation of notional rent will continue to apply from third home properties onwards. This proposal will benefit those owning two residential properties due to professional or family reasons.
Budget 2019 has also proposed to allow taxpayers to buy or construct two residential properties to save long-term capital gains derived from selling an existing residential property. Currently, this exemption under Section 54 is only available on buying or constructing one residential property. The increased exemption will incentivise existing homeowners to buy new properties and improve demand in the housing industry.
Extension of Section 80IBA will increase supply in the affordable housing segment:
Continuing with the focus on affordable housing segment over the last few years, Budget 2019 has extended the Section 80IBA deduction to March 31, 2020. Under Section 80IBA, developers can claim 100 percent tax deduction on profits made from building projects under the affordable segment category. This will incentivise builders to build more housing projects under the affordable housing category and speed up the process of achieving “Housing for All by 2022”.
Misses Not removing LTCG tax exemption on equities and equity mutual funds:
The financial services industry had high hopes of Budget 2019 removing 10 percent LTCG tax on equities and equity mutual funds. The LTCG tax exemption had played a key role in increasing the participation of retail investor segment in the equity markets, especially through mutual funds. Renewing this exemption would have further improved the equity penetration among retail investors. This would have also restored tax parity of equity mutual funds with other equity-oriented schemes like ULIPs and NPS, which still remain LTCG tax-exempt.
Not reintroducing the Section 80EE deductions:
extending Section 80IBA to March 2020 is aimed at improving the supply in the affordable housing segment, Budget 2019 did not propose any direct intervention in the demand side of the segment. The best way to do that was to reintroduce the Section 80EE deduction of Rs 50,000 on interest payment to fresh home buyers. The deduction was available on home loans of up to Rs 35 lakh for house properties valued up to Rs 50 lakh. This deduction was over and above the Rs 2 lakh deduction on interest payment available under Section 24b. Re-introducing Section 80EE deduction would have incentivised first-time home buyers and boosted the demand in the affordable housing segment. Naveen Kukreja is CEO and Co-founder of Paisabazaar.com