IMPACT OF FINANCE BILL 2018 ON SALARIED PERSON TAX

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1 International Journal of Management (IJM) Volume 9, Issue 1, Jan Feb 2018, pp , Article ID: IJM_09_01_011 Available online at Journal Impact Factor (2016): (Calculated by GISI) ISSN Print: and ISSN Online: IAEME Publication IMPACT OF FINANCE BILL 2018 ON SALARIED PERSON TAX Dinesh Goyal Lecturer in Commerce, Department of Commerce, GSSS KAWI Panipat, India ABSTRACT The Finance bill is an important bill in India and the Central Government, through this bill, gives effect to financial proposals at the beginning of every Financial Year. Every Finance bill is assented by the President of India after passing in the both houses of parliament. After it finance bill become Finance Act.This Act applies to all the States and Union Territories of India unless specified otherwise. Finance Act thus making this Act one that renews itself each year. All the Governmental financial policies are included in this Act. The existing policies, new policies, as well as changes made to existing policies are all included here all the elements included in the Finance Act associated with a particular Financial Year are of course important. Even so, there are particular elements that take precedence over the others. The most important element is the rules laid down in the Act with respect to Income Tax Rates. Every year, the Act lays down in detail all the associated provisions related to Income Tax in the country. Since this applies to a large number of taxpayers, it is considered one of the most important elements. The Finance Act for a particular financial year also includes the amendments that have been made with respect to Direct Taxes. The Amendments made under various sections are noted down in this section of the Finance Act and each amendment of every section is noted down separately it also included the details of the insertion of new sections, if any This paper will help to analysis the impact of finance bill 2018 on salaried person tax. Key words: Finance Bill, Finance Act, Standard deduction, Section, Clause. Cite this Article: Dinesh Goyal, Impact of Finance Bill 2018 on Salaried Person Tax. International Journal of Management, 9 (1), 2018, pp INTRODUCTION As per Section 15, the following incomes are chargeable to Income-tax under the head Salaries :- any salary due from an employer or a former employer to an assesse in the previous year whether paid or not; any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it becomes due to him; any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income-tax for any earlier previous year editor@iaeme.com

2 Dinesh Goyal Under the provisions of this section the amount of salary due in the year, amount of advance salary received and the amount of arrears of salary received during the year from the present or past employer are to be included in this head. in the explanation attached to section 15, it has been clearly mentioned that for the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. The important rule is that income once taxed cannot be taxed again, so any salary paid in advance (if taxed in a previous year when the advance salary was received) will not be included again in the total income of the person when the salary becomes due. Advance salary does not include loans, e.g., loan to purchase a car or a scooter or for building a house etc. Any salary, bonus, commission or remuneration, by whatever name called due to or received by a partner of a firm from firm shall not be regarded as salary for the purposes of this section. According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year :Wages; any annuity or pension (Family pension received by heirs of an employee is taxable under income from other sources); any gratuity; any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages; any advance of salary(advance against salary is a loan and hence not taxable); any payment received by an employee in respect of any period of leave not availed of by him(leave encashment or salary in lieu of leave); the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; and the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognized provident fund to recognized provident fund; the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in Section 80CCD. The above definition of word salary U/s 17(1) includes the above mentioned items. These can be explained in following manner Wages any amount received by a person for work done or job rendered is called wages. It may be received under the name of Pay, Basic Pay, Salary, Basic salary or Remuneration. It may be for actual work or leave salary or actually received or due during the relevant previous year. It is fully taxable u/s 15 if received during the relevant previous year. Any Annuity or Pension Any amount received by employee from past employer after attaining the age of retirement or superannuation is fully taxable. It may be received direct as pension or out of a superannuation fund created by employer; in both cases it is taxable. Any Gratuity Any sum received by employee from his past employer as a token of gratitude for services rendered in past is called gratuity. This amount is exempted up to certain limits given u/s 10(10). Any amount received from employer under the name of fee is also fully taxable, any commissions given by employer to employee is fully taxable. Any commission received by a director for standing guarantee for repayment of loan, and if he is not employee of the company, shall be taxable under Income from other sources. In case commission is given to an employee and it is paid as a fixed percentage of turnover achieved by such employee, such commission shall also be treated as part of the salary.bonus is fully taxable under the head Salaries on receipt basis. In case arrears of bonus are received in a previous year, these are fully taxable. Bonus can be of two types, Statutory Bonus It is received under some legal or contractual obligation and is fully taxable. Gratuitous Bonus It is a casual benefit and is taxable as a receipt from employer and having no other implication.any Perquisite means Any benefit or amenity allowed by employer to employee. These are explained in detail u/s 17(2). any cash payment received by employee from employer is called profit in lieu of salary and these are explained u/s 17(3) of income tax act editor@iaeme.com

3 Impact of Finance Bill 2018 on Salaried Person Tax any salary in lieu of leave received during service is fully taxable. any advance salary In case an assessee receives some salary in advance in a previous year and which was actually not due in that year shall be taxable in the year of receipt. It does not include any loan or advance taken from employer 2. RULE TO TAX SALARY INCOME IN INDIA Due and receipt whichever is earlier 3. REVIEW OF SECTION 16 Section 16 of the Income Tax Act provides allowable deductions from Salary Income. There are total three deductions (now two) under section 16, provided in 3 different clauses. Clause (i) of Section 16 allows a Standard Deduction, (omitted recently). Clause (ii) of Section 16 allows deduction for Entertainment Allowance. Clause (iii) of Section 16 allows Deduction for Professional Tax. In India, it last existed during the financial year and allowed a salaried employee to claim a flat deduction from his or her salary income of 30,000 or 40% of salary (if salary did not exceed 5 Lakhs) or a deduction of 20,000 (if salary exceeded 5 Lakhs). After 2005 when standard deduction was withdrawn, employees used to hope before every Budget it would be brought back. Their hope has been fulfilled this time. Finance Minister has announced a standard deduction of 40,000 and said medical allowances, however, would continue.standard deduction will allow for a flat deduction from salary income, to make up for some of the expenses which an employee would typically incur in relation to his employment. The following amounts shall be deducted in order to arrive at the chargeable income under the head Salaries. Section 16(A) Standard deduction: Omitted by Financial Act, 2005 w.e.f Section 16 (ii) Where the employee is in receipt of entertainment allowance, the amount so received shall first be included in the salary income and thereafter the following deduction shall be made under Section 16(ii) A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less. W.e.f. April 1, 2002 entertainment allowance will be allowed in computing income from salary only in case of employees of the Government and will cease to be allowable for persons other than those employed in Government i.e. entertainment allowance deduction will not be allowed to other employees.for this purpose Salary excludes any allowance, benefit or other perquisites: Where an employee, not entitled to claim deduction under this clause, spends some money on the entertainment of customers of the concern, the amount so spent cannot be deducted from the salary income. The condition makes exemption well-nigh impossible for the employees of private sector. For them, the better course would be to get the entertainment expenses reimbursed. Section 16 (iii) Tax on employment or Professional Tax: From the assessment year , deduction shall be allowed in respect of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by a State under any law passed by its legislature. Where Professional/Employment tax is paid by the employer on behalf of the employee, it will first be included in his gross salary as a perquisite, being a monetary obligation of the employee discharged by the employer. Thereafter, a deduction on account of such professional tax shall be allowed to the employee from his gross salary. Professional tax due but not paid shall not be allowed as deduction editor@iaeme.com

4 Dinesh Goyal 4. AMENDMENT IN SECTION 16 In section 16 of the Income-tax Act, after clause (i) [as omitted by section 6 of the Finance Act, 2005 the following clause shall be inserted with effect from the 1st day of April, 2019, namely(ia) a deduction of forty thousand rupees or the amount of the salary, whichever is less. Clause 7 of the Bill seeks to amend section 16 of the Income-tax Act relating to deductions from salaries. The existing provisions of the said section, inter alia, provide that the income chargeable under the head "Salaries" shall be computed after making certain deductions specified therein.it is proposed to insert a new clause (ia) in the said section so as to provide for deduction of forty thousand rupees or the amount of the salary whichever is less,for the purpose of computing the income chargeable under the head salary.this amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years Gross Salary after disallowed and medical reimbursement Table 1 Example Standard Deduction as per Finance Bill 2018 Net Salary Nil AMENDMENT IN SECTION 17 In section 17 of the Income-tax Act, in clause (2), in the proviso occurring after sub-clause (viii), clause (v) shall be omitted with effect from the 1st day of April, 2019.Clause 8 of the Bill seeks to amend section 17 of the Income-tax Act relating to "Salary", "perquisite" and "profits in lieu of salary" defined. Clause (v) of the proviso occurring after sub-clause (viii) of clause (2) of the said section provides that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family not exceeding fifteen thousand rupees in the previous year shall not be treated as perquisite in the hands of the employee. It is proposed to omit the said clause (v).this amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years. From memorandum explaining bill Standard deduction on salary income Section 16, inter-alia, provides for certain deduction in computing income chargeable under the head Salaries. it is proposed to allow a standard deduction up to 40,000/- or the amount of salary received, whichever is less. Consequently the present exemption in respect of Transport Allowance (except in case of differently abled persons) and reimbursement of medical expenses is proposed to be withdrawn. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. 6. IMPACT OF FINANCE BILL 2018 ON SALARIED PERSON Finance Bill 2018 has proposed to provide a standard deduction up to 40,000 from salary income to employees instead of a deduction for and reimbursement of medical expenses of up to Standard deduction is essentially a flat amount subtracted from the salary income before calculation of taxable income. The standard deduction was a part of the Income-tax Act until former finance minister, P. Chidambaram, withdrew it in the Union budget of As per finance bill 2018 there is no change in tax rates however cess increased to 4% from earlier 3%. Prima facie income exempted from tax 68 editor@iaeme.com

5 Impact of Finance Bill 2018 on Salaried Person Tax after setting off the gain and loss comes to only 5800( ). The tax saved for each employee on this income would depend on the tax slab that income falls into. The saving in tax would be 290 for those currently paying 5% tax on this income; 1160 for those paying 20% as tax on this income; and 1740 for those paying 30% tax on this income. However, these savings would be nullified in most cases, except in the case of income up to 5 lakh, due to increase incess Analysis the tax of employee Age <60 with financial year and financial Gross Total Income (it is assumed that and reimbursement of under the head salary) Tax as per Finance Act 2017(With cess 3%and 19200,reimbursement of and 80C deduction Tax as per Finance Bill 2018(With cess 4% and standard deduction up to and 80C deduction after disallowance of 19200, reimbursement of Difference 3 NIL NIL NIL 4 NIL NIL NIL Analysis the tax of employee Age >60 but <80 with financial year and financial Gross Total Income( it is assumed that and reimbursement of 15000) Tax as per Finance Act 2017(With cess 3%and 19200,reimbursement of and 80C deduction Tax as per Finance Bill 2018(With cess 4% and standard deduction up to and 80C deduction after disallowance of transport allowance 19200, reimbursement of Difference 3 NIL NIL NIL 4 NIL NIL NIL 5 NIL NIL NIL editor@iaeme.com

6 Dinesh Goyal 6.3. Employee Age <60(Handicapped Employee) Gross Total Income( it is assumed that after deduction of transport allowance and reimbursement of 15000) 7. CONCLUSIONS Finance Bill 2018 has proposed to provide a standard deduction up to 40,000 from salary income to employees instead of a deduction for and reimbursement of medical expenses of up to Standard deduction is essentially a flat amount subtracted from the salary income before calculation of taxable income. The standard deduction was a part of the Income tax Act until former finance minister, P. Chidambaram, withdrew it in the Union budget of employees used to hope before every Budget it would be brought back. Their hope has been fulfilled this time as per finance bill 2018 there is no change in tax rates however cess increased to 4% from earlier 3%. as per Finance Bill 2018 irrespective of amount of taxable salary the assessee will be entitled to get a deduction of 40,000 or taxable salary whichever is less. if a person has worked for few days or months and his salary is just 40,000 for a previous year, then he will be entitled to deduction equal to salary being the same amount. If his salary is the deduction shall be restricted to 65,000. If salary exceed amount of 40,000, the deduction shall be restricted to 40,000. Standard deduction should be linked to amount of salary because with increase in salary, expenses in connection with employment also increases. Standard deduction of 40,000 p.a. for salaried individuals seems to be a very nominal benefit as the current tax-free limit for medical expense reimbursement of 15,000 p.a. and exemption of 1,600 p.m. is anyway leading to a total tax-free salary of 34,200 p.a Therefore, a provision can be made to allow deduction equal to a specific rate of salary subject to maximum Limit. REFERENCES [1] Finance Bill 2018 [2] Finance Bill 2005 Tax as per Finance Act 2017(With cess 3%and 38400,reimbursement of and 80C deduction [3] Dr Vinod K Singhania,Taxmann ready reckoner [4] ICAI CA Final Study Material Tax as per Finance Bill 2018(With cess 4% and standard deduction up to 40000,80C deduction and after deduction of 38400, but disallowed of reimbursement of Difference 3 NIL NIL NIL 4 NIL NIL NIL editor@iaeme.com

7 Impact of Finance Bill 2018 on Salaried Person Tax [5] Income Tax Act [6] CA Farooq Haque,CA Final Direct Laws [7] Dr. Girish Ahuja, Systematic Approach to Income tax [8] Dr. Yogendra Bangar, Direct Tax Laws [9] ICAI, Direct tax Case laws [10] Prctice Mannual CA Final Direct Tax Laws [11] CA Vinod Gupta Direct Tax Summary [12] [13] [14] [15]

Salary, perquisite and profits in lieu of salary defined.

Salary, perquisite and profits in lieu of salary defined. 17. For the purposes of sections 15 and 16 and of this section, (1) salary includes (i) wages; (ii) any annuity or pension; (iii) any gratuity;