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Budget FY 2016-17 – Tax on Salary

A new tax year is about to begin and it is time to get ready to implement the budget proposals related to tax on salary. As you are aware, the Union Budget for FY 2016-17 was tabled in the Parliament by the Finance Minister of India on 29-Feb-2016. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2016-17.

1. The tax slabs remain the same.

The tax rates for salaried employees below 60 years of age for FY 2016-17 shall be the same as those for FY 2015-16.

Total Income for the Year in Rs Tax Rate in %
Up to 2,50,000 Nil
2,50,001 to 5,00,000 10
5,00,001 to 10,00,000 20
Above 10,00,000 30

The tax rates for salaried employees aged 60 years and above but below 80 years for FY 2016-17 are as follows.

Total Income for the Year in Rs Tax Rate in %
Up to 3,00,000 Nil
3,00,001 to 5,00,000 10
5,00,001 to 10,00,000 20
Above 10,00,000 30

Note:
1. The Education cess including Higher Education cess stays at 3%.

2. Tax relief under Section 87A

The tax credit under Section 87A has been increased to Rs 5,000 for FY 2016-17 (from Rs 2,000 for FY 2015-16) if the total income does not exceed Rs 5 lakh for the year. This means that there will be no tax payable up to a taxable salary of Rs 3 lakh per annum.

3. Increase in surcharge

In case the total taxable income goes beyond Rs 1 crore in the year, a surcharge of 15% (subject to marginal relief) is to be deducted – the surcharge was 12% in FY 2015-16.

4. Employer contribution to superannuation fund

Any employer contribution made to a superannuation fund in excess of Rs 1.5 lakh shall be taxable – the limit was Rs 1 lakh in FY 2015-16.

5. Construction period in respect of housing loan interest benefit

As per Section 24, the acquisition or construction of house property should now be completed within five years (it was  3 years in FY 2015-16) from the end of the financial year in which capital was borrowed – for an employee to get the interest benefit of Rs 2 lakh (for a self-occupied house). Given the delays in construction of apartments/house properties these days, the increase in time limit from 3 to 5 years will help a number of employees who wish to avail benefit under Section 24.

6. Benefit to first home buyers

Section 80EE – The budget provides for a benefit of Rs 50,000 on interest payment towards housing loan taken by first home buyers subject to the following conditions.

a. The benefit shall be available from FY 2016-17 and continued with in subsequent years until the limit of Rs 50,000 is attained. Please note that this benefit is in addition to the interest benefit provided by Section 24 of the Income Tax Act.

b. The housing loan should be sanctioned by a financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017.

c. The amount of loan sanctioned for acquisition of the residential house property should not exceed Rs 35 lakh.

d. The value of residential house property should not exceed Rs 50 lakh.

e. The employee should not own any residential house property on the date of sanction of loan.

f. The employee should have taken the housing loan from a financial institution (a banking company to which the Banking Regulation Act, 1949 applies, or any bank or banking institution referred to in section 51 of that Income Tax Act or a housing finance company).

First home buyer
The Finance Bill states that the assessee should not own any residential house property on the date of sanction of loan. Does this mean that an assessee could have owned and sold a house property prior to the date of sanction of loan and still be eligible for this benefit? The Finance Bill does not explicitly state that the employee should be first time home buyer to be eligible for this benefit. However, the Finance Minister, in his budget speech, clearly mentions that this benefit is available to “first – home buyers.” Hence, we presume that an employee should not be owning or have owned any house property at the time of or prior to the date of sanction of the loan in order to be eligible for Section 80EE benefit.

7. Taxability of employer’s contribution to Provident Fund (PF)

Currently, any employer PF contribution in excess of 12% of salary (Basic and Dearness Allowance) is taxable as per The Fourth Schedule of the Income Tax Act. The Finance Bill has introduced a limit of Rs 1.5 lakh in addition to the 12% limit. Consequently, as per the revised Rule 6(a) of the Fourth Schedule of the Income Tax Act, the exemption on PF contribution made by the employer shall now be restricted to 12% of the salary of the employee or Rs 1.5 lakh, whichever is lower.

The limit of Rs 1.50 lakh has been dropped in the amendment to the Finance Bill 2016, as passed by the Parliament. Consequently, any Employer PF contribution which is more than 12% of salary shall be taxable in the hands of an employee without the Rs 1.5 lakh limit.

8. Deduction in respect of rent paid – Section 80GG

Employees, who do not receive House Rent Allowance from their employer, but pay house rent, are eligible to seek deduction in respect of rent paid, under Section 80GG. The maximum deduction which was Rs 2,000 per month in FY 2015-16 has been increased to Rs 5,000 per month for FY 2016-17. Please note that the conditions pertaining to Section 80GG should be met by an employee for availing the benefit.

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  1. venkatesh September 30, 2016

    sir, if the employee salary is 12000 pr month,he gained the salary for the month is 10000 due to four leaves in that month. Is esi is calculated on 12000 or 10000

    reply
    • gautham October 3, 2016

      ESI should be calculated on the earned pay (after application of loss of pay) – i.e. Rs. 10,000.

      reply

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