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Budget FY 2017-18 – Tax on Salary

The Union Budget for FY 2017-18 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2017. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2017-18.

1. A change in the tax rate.

The tax rate for the Rs 2,50,001 to Rs 5,00,000 salary slab changes from 10% to 5%. The rates for the other salary slabs remain the same.

The tax rates (for FY 2017-18) for salaried employees below 60 years of age are as follows.

The tax rates (for FY 2017-18) for salaried employees aged 60 years and above but below 80 years are as follows.

Note:
1. The Education cess including Higher Education cess stays at 3%.

2. Tax relief under Section 87A

The tax credit under Section 87A has been decreased to Rs 2,500 for FY 2017-18 (from Rs 5,000 for FY 2016-17) if the total income does not exceed Rs 3.5 lakh (reduced from Rs 5 lakh for FY 2016-17) for the year. This means that there will be no tax payable up to a taxable salary of Rs 3 lakh per annum.

3. A new surcharge

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 – there was no equivalent surcharge in FY 2016-17.

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 2016-17 too.

4. Restriction of housing loan interest benefit.

In FY 2016-17, the maximum interest (on housing loan) benefit one could get on self-occupied property was Rs 2 lakh while for let-out property there was no ceiling on the interest benefit as long as the employee declared the rent (received or deemed to be received) as income from house property. For example, let assume that an employee owned 2 properties – one self-occupied and the other let-out.

1. If the employee’s interest payable on the self-occupied property was Rs 2 lakh, the benefit available on the self-occupied property was Rs 2 lakh.

2. If the employee’s interest payable on housing loan for the let-out property was Rs 6 lakh and he received Rs 3 lakh as rent, the benefit available on the let-out property was Rs 3 lakh.

In total, the employee could set-off the loss of Rs 5 lakh (Rs 2 lakh from self-occupied property and Rs 3 lakh from let-out property) against his salary, thereby reducing his taxable salary.

As per the 2017 budget, in FY 2017-18, the maximum interest benefit available on house property shall be restricted to Rs 2 lakh, irrespective of the number of house properties owned.

In the above example, the employee can set-off only Rs 2 lakh (even after considering both the properties) against his salary in the year FY 2017-18.

It may be noted that the unused benefit (beyond Rs 2 lakh) can be carried forward to subsequent years up to 8 years and set off against house property income in subsequent years.

This change is likely to increase the tax liability of many employees (especially those that draw a high salary) who have been claiming housing loan interest benefit on multiple house properties so far.

5. Phasing out of Rajiv Gandhi Equity Savings Scheme.

Currently, under Section 80CCG, employees who have invested in listed equity shares or units in equity oriented funds can claim deduction of 50% of amount invested to the extent such deduction does not exceed Rs 25,000 for three consecutive years (subject to certain conditions).

From FY 2017-18, no fresh deduction under the scheme can be claimed. However, those who have invested and claimed deduction earlier can continue to claim deduction for the next 2 years, until 31-Mar-2019, subject to conditions.