An interim Budget presented by the stand-in finance minister Piyush Goyal at the cusp of a crucial national election ahead heralded a refreshing new age outlook. The budget delivered. It was a class act to harness two birds with one stone – targeting two critical sections of the electoral that is both, economically distressed and are crucial electoral constituencies.
One the one hand, the farm sector. The proposal for a structured direct income support to small and marginal farmers holding up to 2 hectares of land to the extent of Rs 6,000 per annum introduces the concept of Universal Basic Income (UBI) in India for the first time. If administered well, it addresses the critical dilemma of poverty and generates hope for the marginalised section of the population that continues to suffer the plight of existence for ages. The fact that the budget highlighted a concrete number of 12 crore marginal farmers, one hopes that the intent truly delivers.
On the other hand, is the burgeoning middle class taxpayers, who will be deeply relieved by what the interim budget had to offer them. In a master stroke, the proposal included a rebate of tax for all those who had total income of up to Rs 500,000 without touching the slabs rates. The impact of this is to direct all relief to the middle class taxpayers without touching the higher income groups. Besides this, the other key proposal was to increase the standard deduction from Rs 40,000 to Rs 50,000.
Another very pragmatic proposal was on account of deleting the tax charged on notional income for a second residential house. Per current tax law, any individual owning an additional house property other than the one used for one’s own accommodation was taxed on the basis of computing a notional rental income based on the standard rent of the area. This provision was a dampener for individuals and families who need more than one residential property to accommodate their families.
By introducing the proposal to exclude this second house from the realm of notional taxation, it eases the hardship of several urban middle class families that are helpless about having to maintain two houses and pay taxes based on notional rents. It follows that only the second house is exempt – more than two residential properties will continue to be taxed based on notional rent. The limit for tax deduction at source on rental income under section 194-I of the Income-tax Act, 1961 (the Act) is also marginally increased from Rs 15,000 per month to Rs 20,000 per month.
The increase of the limit of bank and post office deposit interest for the purpose of tax deduction at source from Rs 10,000 to 40,000 comes as a big relief to several sections of the middle class society including the retired, senior citizens and home makers who have savings invested. It relieves them of the burden of having to file tax returns to claim refunds even though they would not have otherwise come under the tax bracket and would not have a need to file tax returns, but to claim the refund.
Yet another significant proposal in the Budget was around the roll-over of the Capital gains tax on sale of a residential house. Hitherto, under section 54 of the Act, if capital gains earned out of the sale of a residential house was reinvested in another residential house either by way of purchase or construction of another residential house within a specified time and other conditions, such gains could be kept out of the tax net. This provision addresses the needless burden of capital gains relating to replacement or change of residence. However, keeping in view the practicalities for the urban middle class, the proposals have extended this benefit to reinvesting into up to two residential homes instead on one subject to a limit of Rs 2 crore.
Keeping up the pragmatism for the real estate sector, reeling under a subdued market on the demand side, the Budget introduced two significant proposals.
The first is to extend the time to affordable housing projects from the current date of March 31, 2019 to be registered by the competent authority to claim tax deduction from profits and gains derived from the business of developing and building affordable housing projects, to March 31, 2020. The second significant fillip given to the Industry was around taxing the unsold inventory of buildings and lands appurtenant. Under section 23 (5) of the Act currently, the annual value of such unsold stock in trade is taxable after the end of ONE year from the year in which the certificate of completion is obtained. The proposal now extends this time to two years thereby granting big relief to cash strapped real estate businesses.
In summary, interim Budget 2019 demonstrates a shrewd yet intelligent and pragmatic approach to address two key distressed constituency with the hope that finally, we will see intend turn to genuine action and relief. Amen!
Vikram Bapat is partner, Grant Thornton India LLP.