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The tax surcharge on high-income earners has increased sharply. For individuals whose taxable income is more than ₹2 crore and up to ₹5 crore, the surcharge on tax has increased from 15 per cent to 25 per cent. And for more than ₹5 crore, the surcharge has increased from 15 per cent to 37 per cent. With this, the effective tax rate will go up to 39 per cent for those in the ₹2 crore – ₹5 crore taxable income bracket, and to 42.74 per cent for those with taxable income over ₹5 crore. That’s an increase of about 3 percentage points and 7 percentage points respectively from the earlier effective tax rate of 35.88 per cent.
For other taxpayers, there has been no change from what was announced earlier in the February 2019 Budget. So, for most of the taxpayers, there is no additional relief in terms of increase in the income slabs or deduction limits. At the same time, there is no increase in tax.
With this, there are now five categories of taxpayers — those with taxable income of a.) up to ₹50 lakh (no surcharge), b.) more than ₹50 lakh and up to than ₹1 crore (10 per cent surcharge), c.) more than ₹1 crore and up to ₹2 crore (15 per cent surcharge), d.) more than ₹ 2 crore and up to ₹5 crore (25 per cent surcharge), e.) more than ₹5 crore (37 per cent surcharge).
The Budget has also increased the interest deduction on loan taken (up to 31st March 2020) for purchase of affordable house (having value up to ₹45 lakh) by first-time homebuyers. So, in addition to the existing interest deduction of up to ₹2 lakh on home loans, there will be an extra interest deduction of up to ₹1.5 lakh for loans taken to buy an affordable house; thus taking the total deduction benefit up to ₹3.5 lakh a year.
Besides, individuals who take a loan (on or before March 31, 2023) to buy an electric vehicle will get interest deduction up to ₹1.5 lakh a year.
In the run-up to the Budget, there was speculation that inheritance tax (estate tax) that was abolished in 1985 may make a comeback to shore up the government’s revenue and reduce the growing inequality in the country. But the risk of operational hassles and litigation seems to dissuade the government from this move. Instead, the government has increased the surcharge on high-income earners, as it did when it abolished Wealth Tax in 2015.
Had inheritance tax been re-introduced, the wealthy might have had to pay much more. The increase in tax surcharge, while it will certainly pinch high-income earners, may still be less costly. This is something the Finance Minister alluded to in her speech when she quoted from the Pura Nanooru, a Tamil Sangam Era work. For the remaining taxpayers, expectations were running high, as usual, for tax breaks. But any largesse was always unlikely — given that the February Budget, just five months back, has already given them some sweeteners in the run-up to the general elections. Also, the Centre’s tight financial position would have held its hand.