The provisions in the Finance (No.2) Bill, 1996, in the sphere of
direct taxes relate to the following matters:-
(i) Prescribing the rates of income-tax on incomes liable to tax for the
assessment year 1996-97; the rates at which tax will be deductible at source
during the financial year 1996-97 from interest (including interest on
securities), dividends, winnings from lotteries or crossword puzzles, winnings
from horse races, and other categories of income liable to deduction of tax at
source under the Income-tax Act; rates for computation of "advance tax",
deduction of income-tax from "Salaries" and charging of income-tax on current
incomes in certain cases for the financial year 1996-97.
(ii) Proposal to reduce the levy of surcharge in the case of a domestic
company having total income exceeding seventy-five thousand rupees from 15
per cent. to 7.5 per cent. of the income-tax.
(iii) Amendment of the Income-tax Act, 1961, with a view to promoting
welfare, providing incentives for infrastructure development,
industrialisation and regional co-operation, rationalistion of certain
provisions and checking tax evasion and avoidance.
(iv) Amendment of the Wealth-tax Act, 1957, for rationalisation of certain
provisions.
2. Subject to certain exceptions, which have been indicated while dealing
with the relevant provisions, the Bill follows the principle that changes in
the provisions of the tax laws, should ordinarily be made operative
prospectively in relation to current incomes and not in relation to incomes of
past years. The substance of the main provisions in the Bill relating
to direct taxes is explained in the following paragraphs:-
INCOME-TAX
I. Rates of Income-tax in respect of incomes liable to tax
for the assessment year 1996-97.
In respect of incomes of all categories of taxpayers (corporate as
well as non-corporate), liable to tax for the assessment year 1996-97, the
rates of income-tax (including surcharge thereon in the case of domestic
companies) have been specified in Part I of the First Schedule to the Bill and
are the same as those laid down in Part III of the First Schedule to the
Finance Act, 1995, for the purposes of computation of "advance tax", deduction
of tax at source from "Salaries" and charging of tax payable in certain cases
during the financial year 1995-96.
II. Rates for deduction of income-tax at source during the financial year
1996-97 from income other than "Salaries"
The rates for deduction of income-tax at source during the financial year
1996-97 from incomes other than "Salaries", have been specified in Part II of
the First Schedule to the Bill. These rates apply to income by way of
interest on securites, interest other than "interest on securities",
dividends, insurance commission, winnings from lotteries or crossword puzzles,
winnings from horse races and income of non-residents (including non-resident
Indians). These rates are the same as those specified in Part II of the First
Schedule to the Finance Act, 1995, for the purposes of deduction of income-tax
at source during the financial year 1995-96. The amount of income-tax so
deducted at source shall be increased in the case of a domestic company,
having a total income exceeding seventy-five thousand rupees, by a surcharge
calculated at the rate of 7.5 per cent. of such income-tax
III. Rates for deduction of income-tax at source from "Salaries", computation
of "advance tax" and charging of income-tax in special cases during the
financial year 1996-97
The rates for deduction of income-tax at source from "Salaries" during
the financial year 1996-97 and also for computation of "advance tax" payable
during that year in the case of all categories of taxpayers, have been
specified in Part III of the First Schedule to the Bill. These rates are also
applicable for charging income-tax during the financial year 1996-97 on
current incomes in cases where accelerated assessments have to be made, e.g.,
provisional assessment of shipping profits arising in India to non-residents,
assessment of persons leaving India for good during that financial year,
assessment of persons who are likely to transfer property to avoid tax or
where an order has to be passed in a search and seizure case where search was
initiated before the 1st day of July, 1995, for calculating the amount of tax
on the estimated undisclosed income, etc. The salient features of the
rates prescribed in the said Part III are indicated in the following
paragraphs:-
A. Individuals, Hindu undivided families, etc.
Paragraph A of Part III of the First Schedule specifies the rate of
income tax in the case od Individuals, Hindu undivided families, associoation
of persons etc.
There is no change in the exemption limit which remains at Rs. 40,000. The
income slabs and the tax-rates are also the same except that the rate
applicable in the first income slab i.e. between Rs. 40,001 and Rs. 60,000 has
been reduced from 20 per cent. to 15 per cent.
The Table below gives the income slabs and the rates of income-tax (a) as
specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to
the Bill, i.e., the existing slabs and rates; and (b) as specified in
Paragraph A of Part III of the First Schedule to the Bill i.e. the proposed
slabs and rates:-
Income slab Rates specified in Income slab Rates
specified in Sub-Paragraph I of Paragraph A of
Paragraph A of Part I of Part III of the First
the First Schedule to the Schedule to the Bill
Upto Rs. 40,000 Nil Upto Rs. 40,000 Nill
Rs. 40,001 - Rs. 60,000 20% Rs. 40,001 - 60,00 15%
Rs. 60,001 - Rs. 1,20,000 30% Rs. 60,001 - 1,20,000 30%
Above Rs. 1,20,000 40% Above Rs. 1,20,000 40%
The impact of reduction of tax rate in the first income slab in the
case of individuals, HUFs, etc. at different income levels would be as under:-
Total Income Existing Tax Liability New Tax Liability Proposed Relief
(Rs.) (Rs.) (Rs.) Amount (Rs.)Percentage
41,000 200 150 50 25
42,000 400 300 100 25
43,000 600 450 150 25
44,000 800 600 200 25
45,000 1,000 750 250 25
50,000 2,000 1,500 500 25
55,000 3,000 2,250 750 25
60,000 4,000 3,000 1,000 25
75,000 8,500 7,500 1,000 11.8
1,00,000 16,000 15,000 1,000 6.3
1,20,000 22,000 21,000 1,000 4.5
1,50,000 34,000 33,000 1,000 2.9
2,00,000 54,000 53,000 1,000 1.9
There will now be no distinction in the tax rates applicable to
specified Hindu undivided families (i.e. those with one or more members having
independent total income exceeding the exemption limit) and unspecified Hindu
undivided families. The same rates i.e. those specified in Paragraph A of
Part III of the First Schedule to the Bill, will apply to all Hindu undivided
families.
B. Co-operative societies
In the case of co-operative societies, the rates of income-tax have
been specified in Paragraph B of Part III of the First Schedule to the Bill.
These rates are the same as those specified in the corresponding Paragraph of
Part I of the First Schedule to the Bill.
C. Firms
In the case of firms, the rate of income-tax has been specified in
Paragraph C of Part III of the First Schedule to the Bill. This rate is the
same as that specified in the corresponding Paragraph of Part I of the First
Schedule to the Bill.
D. Local authorities
In the case of local authorities, the rate of income-tax has been
specified in Paragraph D of Part III of the First Schedule to the Bill. This
rate is the same as that specified in the corresponding Paragraph of Part I of
the First Schedule to the Bill.
E. Companies
In the case of companies, the rates of income-tax have been specified
in Paragraph E of Part III of the First Schedule to the Bill. These rates
are the same as those specified in the corresponding Paragraph of Part I of
the First Schedule to the Bill.
F. Surcharge
In the case of domestic companies, surcharge has been reduced from the
existing rate of 15 per cent. to 7.5 per cent. of the amount of income-tax
where the total income exceeds seventy-five thousand rupees. This will have
the effect of reducing the tax burden of such companies by 3 per cent.
[Clause 2]
WELFARE MEASURES
Income-tax exemption to pension funds set up by the
Life Insurance Corporation of India,
deduction for contributions and exemption for commuted value
The Life Insurance Corporation of India (LIC) is starting a new
personal-cum-family pension scheme. The scheme will offer attractive terms
to its contributors and will have a provision for payment of a life time
widow's pension in the event of the death of the contributor during the
contribution period.
With a view to making the aforesaid pension scheme popular, it is
proposed to provide for a deduction of up to ten thousand rupees to an
individual in respect of any contribution made towards the scheme. The amount
of pension received in the hands of the contributor or the nominees shall be
taxable. However, it is proposed to exempt the commuted amount receivable on
maturity of the scheme.
Further, in order to enable the LIC to offer attractive terms to the
contributors, it is proposed to exempt from income-tax income of such funds
which the LIC may set up on or after the 1st October, 1996 under the scheme to
which contributions are made by the contributors.
It is also proposed that the pension scheme will be approved by the
'Controller of Insurance'. 'Controller of Insurance' shall mean an officer
appointed by the Central Government to perform the duties of the Controller of
Insurance under the Insurance Act, 1938 (4 of 1938).
The proposed amendment will take effect from 1st April, 1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clauses 4 & 22]
Income-tax exemption to associations of registered trade unions.
Under the existing provisions of clause (24) of section 10, any income of
a registered union within the meaning of the Trade Unions Act, 1926 (16 of
1926), under the heads "Income from house property" and "Income from other
sources" is exempt from income-tax if such trade union is formed primarily for
the purpose of regulating the relations between workmen and employers or
between workmen and workmen.The Bill seeks to provide similar exemption to an
association of trade unions of the nature specified under the existing
provisions of clause (24) of section 10.
The proposed amendment will take effect from 1st April, 1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 4]
100% deduction to donations made to a fund set up by a
State Government for the medical relief of the poor,
National or State Blood Transfusion Councils and
Defence Services funds for welfare of their personnel
Under section 80G of the Income Tax Act, a deduction from total income
is allowed in respect of donations made by an assessee. In most cases the
deduction is 50% of the donations. However, in respect of donations to certain
funds and for universities, 100% deduction is allowed.
The Bill proposes to amend section 80G to provide for deduction of
hundred percent. of donations made by tax payers to the funds established by
the State Governments to provide medical care to the poor.
The Bill also proposes to amend section 80G in order to provide for
100% deduction in the case of tax payers who make a donation to the National
Council of Blood Transfusion headed by the Additional Secretary (AIDS Control
Project) in the Govt. of India, or the State Councils headed by the Secretary,
Health of the concerned State Government/Union Territory, to be set up in
consultation with the National Council.
The Bill also proposes to amend section 80G in order to provide for
100% deduction to donations made to the following funds of the Armed Forces:
(i) Army Central Welfare Fund,
(ii) Indian Naval Benevolent Fund, and
(iii) Air Force Central Welfare Fund.
The proposed amendments will take effect from 1st April,1997 and will,
accordingly, apply in relation to assessment year 1996-97 and subsequent
years. [Clause 25]
Deduction in respect of medical treatment of
chronic and protracted diseases and terminal
ailments such as AIDS, Thalassemia, etc.
There are some chronic and protracted diseases and terminal ailments,
which are either not permanently curable or take a long time to cure.
In some of these ailments, the individuals and their guardians have
to spend a substantial amount towards their medical treatment, nursing,
training and rehabilitation. The resources of the Government are not
adequate to provide for proper medical treatment to persons suffering from
chronic ailments, at a subsidised cost.
The Bill proposes to provide for a separate deduction of fifteen
thousand rupees in the computation of total income of an individual suffering
from chronic and protracted diseases and terminal ailments or to any
individual or HUF, on whom such individual is dependant. The diseases in
respect of which the deduction would be available shall be notified in the
Income-tax Rules. The tax payer shall have to submit a certificate in this
regard from a prescribed authority every year along with the return of income.
The proposed amendment will take effect from 1st April,1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 24]
Rebate of Income-tax in case of senior citizens.
Section 88 B of the Income-tax Act provides for a special tax
relief in the form of an additional rebate of forty per cent from the net tax
payable by persons who have attained the age of 65 years and have a gross
total income not exceeding one hundred thousand rupees. The maximum tax rebate
available is Rs.6,400 at present.
The rebate to the senior citizens has been provided to help them in
meeting the rising cost of old age care and medical expenses.
The Bill proposes to extend the existing rebate to individuals of sixty-
five years and above whose gross total income does not exceed one hundred and
twenty thousand rupees.
The proposed amendment will take effect from 1st April,1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 34]
Raising of standard deduction in the case of
low-paid salaried employees
Under the existing provisions of section 16 of the Income-tax Act, a
standard deduction of a sum equal to 33-1/3 per cent. of the salary or
Rs.15,000, whichever is less, is allowed.
The Bill proposes to enhance the upper limit of standard deduction
to eighteen thousand rupees in the case of employees having income upto sixty
thousand rupees. In other cases, the existing limit of deduction shall
continue.
The proposed amendment will take effect from 1st April,1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 7]
Enhancement of deduction in respect of medical insurance premium
Raising of monetary limits in respect of rents paid
Under section 80GG of the Income Tax Act, a taxpayer, not in receipt of
house rent allowance, is entitled to a deduction of Rs. 1000/- per month or
25% of total income whichever is less, if the house rent paid by him is in
excess of 10% of his total income.
In view of the high rents prevailing, the Bill proposes to raise the
monetary limit of deduction to Rs. 2000/- without modifying the other ceiling
of deduction in terms of percentage of total income, which is 25%.
The proposed amendment will take effect from 1st April,1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 26]
Increase in the limit of deduction allowable for interest
payable on borrowed capital in respect of
self-occupied house property
Income under the head "income from house property" is calculated after
allowing certain specified deductions from the annual value of house property.
One of the deductions is the amount of interest payable on borrowed capital
used for acquisition, construction, repair, renewal or reconstruction of the
house property. In respect of self-occupied house property, the annual value
is taken at nil. As no notional income is taken into account in respect of
such property, none of the deductions, except on account of interest, is
allowed. Interest on borrowed capital in respect of such property is allowed
only upto Rs. 10,000.
It has been felt that the deduction of Rs. 10,000 is not adequate to meet
the cost of finance. Therefore, in order to provide relief to many middle
class tax payers, the Bill proposes to enhance the limit of deduction on
account of interest payable on borrowed capital in respect of self- occupied
house property from Rs. 10,000 to Rs. 15,000.
The proposed amendment will take effect from 1st April, 1997 and will,
accordingly, apply in relation to assessment year 1997-98 and subsequent
years. [Clause 9]
Extending the deduction on account of interest
payable on borrowed capital in respect of house property
which is vacant due to employment etc. elsewhere
The annual value of self-occupied house property is taken at nil. Under
the provisions of section 23(3), if the property cannot be occupied by the
owner by reason of the fact that owing to his employment, business or
profession carried on at any other place, he has to reside at that other place
in a building not belonging to him, the annual value of such property is also
taken at nil provided that such house is not actually let and no other benefit
therefrom is derived by the owner.
Deduction on account of interest payable on borrowed capital is allowed
upto Rs. 10,000 in case of self-occupied property. No such deduction is,
however, available to assessees who are unable to occupy the property by
reason of their employment, etc. at a place other than where the property is
situated.
The denial of this deduction is a case of genuine hardship. The Bill,
therefore, proposes to extend the deduction on account of interest payable on
borrowed capital to such class of persons also.
The proposed amendment will take effect retrospectively from 1st April,
1995 and will, accordingly, apply in relation to assessment year 1995-96 and
subsequent years. [Clause 9]
