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Budget FY 2018-19 – Tax on Salary

The Union Budget for FY 2018-19 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2018. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2018-19.

1. Tax slabs remain the same

The tax rates for salaried employees below 60 years of age for FY 2018-19 shall be the same as those for FY 2017-18.

The tax rates (for FY 2018-19) for salaried employees below 60 years of age are as follows.

The tax rates (for FY 2018-19) for salaried employees aged 60 years and above but below 80 years are as follows.

2. Surcharge remains the same

In case the total taxable income for the year goes beyond Rs 50 lakh (but is less than or equal to Rs 1 crore) in the year, a surcharge of 10% (subject to marginal relief) on the income tax is to be deducted, as it was in FY 2017-18.

In case the total taxable income for the year goes beyond Rs 1 crore in the year, a surcharge of 15% (subject to marginal relief) on the income tax is to be deducted – the surcharge was 15% in FY 2017-18 too.

3. Introduction of Health and Education Cess

In FY 2017-18, the Education cess was levied at 2% on the income tax and surcharge, if applicable, and the Higher Education cess was levied at 1% on the income tax and surcharge, if applicable. In FY 2018-19, a “Health and Education Cess” shall be levied at 4% on income tax and surcharge, if applicable, in lieu of the Education Cess and the Higher Education Cess.

4. Reintroduction of Standard Deduction for salaried employees

A standard deduction of Rs. 40,000 shall be applied as a deduction on salary, for the purpose of calculating taxable salary in FY 2018-19. You may be aware that standard deduction was abolished some years ago. It has now been reintroduced.

5. No tax benefit on reimbursement of medical expenses

According to Section 17 of the Income Tax Act, any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family is exempted from income tax as long as such sum does not exceed fifteen thousand rupees. This clause has now been omitted and from FY 2018-19, any reimbursement of medical expenses by the employer will be fully taxable in the hands of the employee.

6. No tax benefit on transport allowance, except for differently abled employees

According to Rule 2BB of the Income Tax Act, any transport allowance paid to an employee (who is not a disabled employee) to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is exempted from income tax to a maximum of Rs 1,600 per month. This rule has now been omitted and the exemption will not available from FY 2018-19.

However, in case of disabled employees (please see the income tax rules for the exact definition of disabled for determining eligibility for this benefit), transport allowance will continue to remain exempted to the extent of a maximum of Rs 3,200 per month.

7. Change to medical insurance tax benefit for senior citizens

Section 80D allows a deduction of up to Rs 30,000, for senior citizens, in respect of payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen. From FY 2018-19 onwards, the deduction limit has been enhanced to Rs 50,000. Please note that the enhancement in deduction is only for senior citizens and very senior citizens.

8. Enhanced deduction for expenses incurred for treatment of specified diseases for senior citizens

Section 80DDB allows a deduction of up to Rs 60,000, for senior citizens, for treatment of specified diseases. From FY 2018-19 onwards, the deduction limit has been enhanced to Rs 100,000. Please note that the enhancement in deduction is only for senior citizens.

9. Deduction in respect of interest income to senior citizen

Currently, a deduction up to Rs 10,000 is allowed under section 80TTA to an employee in respect of interest income from savings account. The budget has proposed creation of a new section 80TTB which would allow a deduction of up to Rs 50,000 in respect of interest income from deposits held by senior citizens. If an employee is a senior citizen, please calculate deduction under section 80TTB instead of section 80TTA from FY 2018-19 onwards.

10. No deduction benefit if tax return is not filed by the due date

The finance bill proposes the introduction of a new clause under Section 80AC of the Income Tax Act.

80AC. Where in computing the total income of an assessee of any previous year relevant to the assessment year commencing on or after––

(i) the 1st day of April, 2006 but before the 1st day of April, 2018, any deduction is admissible under section 80-IA or section 80-IAB or section 80-IB or section 80-IC or section 80-ID or section 80-IE;

(ii) the 1st day of April, 2018, any deduction is admissible under any provision of this Chapter under the heading “C.—Deductions in respect of certain incomes”,

no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of section 139.

The text in bold in the above quote is the new clause proposed to be introduced. The new clause proposes to deny certain deductions under Chapter VIA in case an employee files his tax return beyond the due date specified by the Income Tax Act. Some tax practitioners have opined that this includes denial of 80C deductions. However, it should be noted that heading “C – Deduction in respect of certain incomes” (specified in the new clause) does not include 80C deductions which come under heading “B — Deductions in respect of certain payments” within Chapter VIA of the Income Tax Act.

This means that employees will not be denied 80C deductions even if they file their return after the due date.