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What are the benefits of standard deduction available to salaried persons?

Author: Col. Sanjeev Govila(Retd)/Tuesday, June 12, 2018/Categories: Ask the Finapolis

What are the benefits of standard deduction available to salaried persons?

I currently work in a private organization in Kochi. My gross annual salary is Rs 6 lakh. My gross salary includes both conveyance allowance and medical reimbursement components. I come across a news item relating to budget which states there will now be a standard deduction of Rs 40,000 available to salaried persons. Will I be able to get the extra benefit of Rs 40,000 over and above the allowances given to me? Please help in calculating my tax liability post this announcement.

Deepak Ram, Kochi

The newly proposed change in the Income Tax Act has allowed the ‘Standard Deduction’ of Rs 40,000/- for salaried personnel. This benefit is the replacement of the Conveyance and Medical allowances earlier available. The same will be applicable from 1st April, 2018 onwards only.

With the introduction of standard deduction of Rs 40,000/-, the benefit of Rs 19,200/- (Conveyance) and Rs 15,000/- (Medical) is withdrawn. Hence you will end up claiming a deduction of merely Rs 5,800/- (i.e. Rs 40,000 – 19,200- 15,000/-) more than what you have been claiming in the past.

I have kept my post retirement corpus as fixed deposit in a public sector bank. I expect my interest income from fixed deposits to be around Rs 3 lakh in 2018-19. Apart from fixed deposit, I have also opened a Recurring Deposit (RD) in bank, which will give me an interest income of Rs 10,000 next year. How much tax I have to pay from my interest income in the next financial year? Please guide me in this matter.

Rama Ranjan Vora, Bangalore

Finance Bill 2018 has proposed to insert a new section 80TTB (applicable only to Senior Citizens) so as to allow a deduction up to Rs 50,000/- in respect of interest income from deposits held by senior citizens. Assuming that you are a senior citizen (age more than 60 years), you will be eligible to claim a deduction of Rs 50,000/- from interest on deposits (FDs and RDs). Going by the proposed provision and input provided, you can claim a deduction of Rs 50,000/- from your total interest income of Rs 3,10,000/-. The balance income is required to be offered to tax as per the applicable income tax slab.

I am a stock broker based out of Mumbai. My present holdings in shares stand at Rs 20 lakhs. Value of my holdings stood at Rs 18 lakh on the Budget Day i.e. February 1. Post budgetary announcements, I have bought shares worth Rs 5 lakh and sold shares worth Rs 3 lakh in February. Will the new Long Term Capital Gains Tax introduced in this year’s budget will be applicable to these transactions. Please advise me on the applicability of LTCG tax on equities. Also, kindly explain the grandfathering clause announced by the Finance Minister in this budget.

Abhijit Singh, Mumbai

As per the changes proposed in Finance Bill 2018, Long Term Capital Gain (LTCG) on Equity will be charged to tax at a marginal rate of 10%, after allowing a deduction of Rs 1,00,000/-. Further no indexation benefit will be available. Also, grandfathering clause will be applicable to any notional Long Term Capital Gains till Jan 31, 2018 only (for the highest price of the stock on that day), i.e. gains till this date are proposed to be exempted in calculations for long-term capital gains.

For your information, grandfather clause is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.

This proposed change will be applicable from April 1, 2018, meaning thereby that any sale (LTCG) earned till March 31, 2018 will be free of tax.

I am a salaried person with an annual income of Rs 12 lakh. I save Rs 10,000 every month in various mutual fund schemes through Systematic Investment Plans (SIPs). At the time of my purchase of these mutual fund schemes, there was no long term capital gain tax on these financial instruments.  Now, after imposition of Long Term Capital Gains tax on equity linked mutual funds, should I stay invested in my mutual fund schemes or redeem them. What are the alternate investment products available in the market which can give better returns compared to mutual funds? Please advise me on this matter.

Harpreet Kaur, New Delhi

Equity and Equity oriented investment options were enjoying a preferential tax status which is proposed to be withdrawn by the recent Finance Bill. The scheme proposes to impose a tax @10% on Long Term Capital Gain received over Rs 1,00,000/- per annum. Furthermore, you are liable to pay tax only when you redeem your money, unlike Bank FDs. Equity Mutual funds were, are and will be the better investment option for small and medium investor even after the imposition of LTCG. There are better investment options (which can generate higher return) available in the market but only for those who are ready to take much higher risk and have huge investible surplus. Options includes PMS, Alternative Investment Fund, Equity shares etc but the taxation remains the same.

You should hold your investment and take no action as the long term gains on equity mutual funds earned till Jan 31, 2018 will remain free (‘grandfathered’ as explained in the previous question), whether you redeem today or any time thereafter.

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Col. Sanjeev Govila(Retd)
Col. Sanjeev Govila(Retd)

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