8 Important Budget Announcements About Income Tax Every Professional Should Know

The union budget has been declared and and the average individual must be wondering how things are going to change for them in the financial year 2016-17. Over 180 announcements were made which would make it somewhat difficult to keep track of the really relevant ones.  Hence, we analyzed the budget for 2016 and summarized the relevant announcements. The 8 announcements listed below are the most noteworthy topics of the budget that you should be aware of.

income tax slabs 2016

1. No major change in tax slabs

The average Indian will continue to be taxed at the same rate as the preceding year. There has been no change in the general tax slabs. Citizens earning over Rs. 1 crore, however, will be taxed an additional surcharge of 3%. Earlier, the surcharge for individuals in the 1 crore+ income group were taxed a 12% surcharge with has been increase to 15%.

Take a look at how you should expect to be taxed in FY16

Income Group Tax rate
Rs. 2,50,000 and below No Tax
Rs. 2,50,000 – 5,00,000 10%
Rs. 5,00,000 – Rs. 10,000 20%
Rs.10,00,000 to 1 crore 30%
Rs. 1 crore and above 30% + 15% surcharge

** You’re also liable to education cess of 3% on total income tax+surcharge

2. Time limit for acquisition of homes increased

The time limit for acquisition of property has been increased to five years. Before the budget of 2016, under construction homes that took longer than 3 years to be occupied weren’t eligible for tax deduction. This time limit has been increased by 2 years, keeping in mind that construction delays were hurting the tax payers. The time is calculated from the year in which the capital was borrowed.

3. Housing to become more affordable in the coming year

For those who have a home loan to their name or those planning to get one, things have gotten a little better. In the coming year you will be able to claim higher tax deductions for EMIs on home loans. Tax deductions, for this purpose, have been raised by Rs. 50,000. This means that you can now claim deductions under section 80EE up to Rs. 2,00,000 as compared to the Rs. 1,50,000 in the last year.

This deduction is only applicable under these conditions:

  • The house should be self-occupied.
  • The total cost of the home should be below Rs. 50 lacs
  • The loan amount should not exceed Rs. 35 lacs
  • This should be your first home

4. Provident fund and Pension fund changes for employers

Another important announcement was the decision to tax employer’s contributions to provident fund. From this financial year, employers will be taxed for all contributions over Rs. 1,50,000 for an employee. For instance, if an employee has a basic salary of Rs. 20 lacs, the employer is eligible to pay Rs. 2.4 lacs as provident fund. As per the new rule he will taxed for the amount exceeding Rs.1.5 lacs, which is Rs. 90,000. There was no tax on provident fund contributions before this.

 5. EPF interest to be taxed

Arguably the most disappointing addition to the Budget 2016 is the decision to tax a part of the Provident Fund. The government has decided to tax 60% of the interest accrued on EPF contributions after 1st April 2016. Do note that the tax will only be applied to the interest accrued and not the principle amount. The 60% will also be exempt from tax if it is reinvested in a pension scheme.

While this rule is applicable to EPF (Employee Provident Fund), contributions made to PPF (Public Provident Fund) continue to remain tax free. Employees can currently claim Rs. 1.5 lacs as tax deduction with PPF, which has remained unchanged.

However, this announcement is open for change and according to a latest report, Prime Minister Modi has asked finance minister to hold on implementing this rule.

6. To make Employee Pension Scheme contributions

The government has allotted a Rs.1000 crore budget for Employee Pension Schemes (EPS) contribution. This is only applicable for employees whose income is no more than Rs. 15,000 and have registered for Provident Fund in the new financial year.

8.33% of the employer’s contribution to provident fund used to be routed to EPS which will now be taken care of by the government. This moves seeks to motivcate employers to hire new employees and bring them on their payrolls.

7. Tax rebate increased to Rs. 5000

As per section 87A, all resident individuals earning Rs. 5 lacs or less will be eligible for a tax rebate of Rs. 5,000. This is a Rs. 2000 increase from the rebate of the previous year and is a welcome move for the average tax payer.


8. Deduction for Rent paid increased

Individuals who do not get the benefit of HRA or Rent in any other section of the income tax laws can claim tax deductions under section 80GG. The limit of deduction under this section has been raised from Rs. 24,000 to Rs. 60,000 for the next financial year.

The deduction under section 80GG is the least of the following:

  • 5000 a month
  • Rent Paid – 10% of the total income
  • 25% of the total income of the tax payer in the year.

Although the budget hasn’t been as eventful as we’ve come to expect in the previous years, there were some noteworthy points made. The tax on PF has been deeply criticized while the changes to tax rebates and affordable housing have been welcomed  As an average tax payer, the budget will not change much for you in the coming financial year.