With the 2018 Finance Act now in effect, India’s businesses and payroll departments must adjust to the amendments it introduces…

In early February 2018, Finance Minister Arun Jaitley presented the Finance Act 2018 to the Indian parliament. Following changes by the Lok Sabha, India’s lower house, the Act was given the assent of President Ram Nath Kovind, and came into effect on 1 April 2018.

Renewed annually, the Finance Act is a central component of India’s financial legislation, affecting each of the country’s states and territories. Although its most important focus falls on amendments to income tax rates, the wider changes it introduces may also have significant consequences for employers and employees in India.

In 2018, the significant amendments to, and points of interest in, the Finance Act are as follows:

1. Income Tax

No changes have been made to the slabs or rates for personal tax, which remain set at:

Income (INR) Tax Rate

Up to 250,000 0%

250,001 to 500,000 5%

500,001 to 1,000,000 20%

1,000,000 and over 30%

The following tax exemptions and surcharges remain in effect for the 2018/19 financial year:

  • Tax exemptions for senior citizens (60 years of age or over) and super senior citizens (80 years of age or over). The exemption thresholds work out as: up to 3 lakh (INR 300,000) for senior citizens, and up to 5 lakh (INR 500,000) for super senior citizens respectively.
  • A 10% surcharge on annual taxable income for individuals earning between 50 lakh (INR 5,000,000) and 1 crore (INR 10,000,000).
  • The 15% surcharge on taxable income above 1 crore.

2. Health and Education Cess

A new ‘cess’ (tax) of 4% has been introduced to cover the health and education needs of India’s poor and rural population. The ‘Health and Education’ Cess replaces the Education Cess and the Secondary and Higher Education Cess, previously taxed at 3%. It is estimated the new cess will raise around 11,000 crore.

3. Long Term Capital Gains

  • The existing exemption from income tax for long term capital gains (LTCG) - previously mandated by the Finance Act - has been withdrawn.
  • Under the new Section 112A, LTCG which arise from the sale of equity shares (or units of equity oriented funds) will be taxable at 10% without indexation.
  • Section 50C of the Finance Act has been amended so that, in cases where a stamp duty applied to the transfer of immovable property exceeds not more than 5% of sales value, then the property’s sales consideration shall be taken as the actual value in order to minimise the detrimental effect on capital gains.

4. Tax Deductions

  • Previously, the Finance Act provided an exemption of INR 19,200 for transport allowances, and a prerequisite of INR 15,000 for medical expenses. The Finance Act 2018 abolishes these benefits.
  • The 2018 Finance Act introduces a standard deduction of up to INR 40,000 from salaried taxpayers in lieu of transport allowance and the reimbursement of medical expenses. Therefore, the new rule offers a next benefit of up to INR 5,800 for taxpayers.
  • Section 80D of the 2018 Finance Act has been amended to increase the tax deduction for medical insurance or preventive health check-ups for senior citizens from INR 30,000 to INR 50,000.
  • Section 80DDB of the 2018 Finance Act allows for a deduction of INR 100,000 for medical treatment for senior citizens. An additional deduction for super senior citizens has been withdrawn (effective from 1 April 2018).
  • Section 80TTB of the 2018 Finance Act introduces a new deduction for senior citizens regarding interest on deposits with banks and post offices of up to INR 50,000. Accordingly, S194A has been amended to provide for no tax deducted at source (TDS) up to INR 50,000. With the introduction of the 80TTB deduction, senior citizens are no longer eligible for deduction under Section 80TTA.

5. Gratuity

Following an amendment to Section 4 of the Payment of Gratuity Act, which raised the maximum limit of gratuity from 10 lakh to 20 lakh, the Finance Act 2018 also amends the Income Tax Act, raising the maximum tax exemption for gratuity payments to 20 lakh. This measure came into effect from 29 March 2018.

For more information and insight on India’s tax and payroll legislation, check out activpayroll’s dedicated Global Insight Guide...

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