Budget 2019 being an Interim Budget was supposed to be only a Vote on Account. However, it being an election year, certain populist measures being brought in through the Budget window was but inevitable. However, at the end of the day, it must be said that save for the increase in the tax exemption to Rs 5 lakh, the other direct tax reforms undertaken are rather well thought out and will significantly impact our financial affairs beneficially over the long-term.
As stated earlier, the obvious big bang amendment of Budget 2019 is the raising of the basic exemption limit to Rs 5 lakh. Scores of middle income earning taxpayers will get a relief. But this does not really benefit those in the higher tax brackets as the tax rates etc. are still the same. However, the more far reaching measures of Budget 2019 are with respect to real estate, particularly, income from house property. Basically tax is applicable where there is income and basically there can be only two kinds of incomes related to property – rental income and of course capital gains when property is sold.
We shall come to the capital gains part a bit later, first we shall look at tax on rental income. As mentioned earlier, the basis of calculating income from house property is the rental value. This is the inherent capacity of the property to earn income. Now, property income is perhaps the only income that is charged to tax on a notional basis. This charge is not because of the receipt of any income per se, but is on the inherent potential of the house property to generate income.
So first and foremost, the first property that you buy is exempt from income tax – that is to say, there would be no tax on such property if one lives in the property or has kept the property locked up. The latter scenario may arise if someone resides at a rented place (due to a desire to stay closer to the employment or place of business maybe) or if one stays with one’s parents etc. but yet purchased the property as an investment. This is in so far as the first property is concerned.
However, so far, the second property onwards — even if it had been kept under lock and key, a notional rent value based on the market rental value had to be adopted as your notional income from the second property. To put it differently, even if one earns no income whatsoever from the second property, it was taxable as if it had been put on rent. Now Budget 2019 has brought in the benefits of nil tax hitherto available to only one property to any two properties owned by the taxpayer.
Now coming to the amendment with respect to capital gains. Readers may be aware that Sec. 54 of the Income Tax Act offers exemption from payment of long term capital gains tax on sale of a residential house if the amount of long-term capital gains is invested within a period of two years (three years in case of construction) in another residential house.
Now the Budget provides that where the amount of the capital gain does not exceed Rs 2 crore, the taxpayer will have the option to purchase or construct two residential houses in India (instead of being limited to the erstwhile one house).
Also, this benefit of having the facility of reinvesting the capital gain in two houses instead of one will be only available for any one transaction in the lifetime of the taxpayer i.e. once for a particular stream of long term capital gain income, deduction has been availed of by investing in two residential houses, the same cannot be done again in the entire lifetime of the taxpayer.
A significant point to note here is that it seems from a first reading of the fine print that the above mentioned facility of being able to invest in two houses has been made available to only to Sec. 54 and not to Sec. 54F. Readers may be aware that Sec. 54F offers similar exemption from tax on long-term gains earned from an asset other than a residential house. In other words, if any asset that is not a residential house viz.
land, commercial property, gold etc. is sold and the net consideration is invested (within two or three years as the case may be) in a residential house, then the long term capital gains would be tax-free under Sec. 54F. These provisions haven’t been changed by Budget 2019 that is to say that the tax deduction is still applicable with respect to one residential house only. We wonder why this step motherly treatment meted out to Sec. 54F particularly? Or is it an oversight?
In other miscellaneous provisions, the standard deduction on salary income has been raised from Rs 40,000 to Rs 50,000. Also, the TDS threshold on bank/PO interest income i.e. income below which TDS will not apply, has been raised from Rs 10,000 to Rs 40,000. Once again, as mentioned earlier, this write up is just the first cut from an incipient reading of the Budget papers. But as the popular saying goes – the devil (or the angel perhaps?) may lie in the fine print. Watch this space for updates.
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