In the Budget for 2019-20, the government proposed to increase the surcharge applicable to individuals with a taxable income above Rs 2 crore. Surcharge is an additional levy on income tax which is imposed on taxpayers earning higher income. With the changes proposed in Budget, the effective income tax rates for individuals in the income bracket of Rs 2 crore-Rs 5 crore and those over Rs 5 crore were increased by around 3 per cent and 7 per cent respectively. "In view of rising income levels, those in the highest income brackets need to contribute more to the nation's development," Finance Minister Nirmala Sitharaman said while presenting her first Budget on July 5.
Here are some important points to understand the new income tax changes for the super rich in a better way:
What will be the new effective tax rate as per Budget 2019 announcements?
In the Union Budget 2019, the government proposed to increase the rate of surcharge on individual taxpayers who fall in the higher income brackets.
"As per the announcements, the rate of surcharge will be increased from 15 per cent to 25 per cent if the total income of an individual exceeds Rs 2 crore but doesn't exceed Rs 5 crores," Naveen Wadhwa of Taxmann told NDTV.
"For those earning above Rs 5 crores, the rate of surcharge will be increased to 37 per cent, from the existing 15 per cent," he explained.
However, the government left the rates of surcharge applicable to those with a taxable income less than Rs 2 crore unchanged.
|Taxable income||Present surcharge||Proposed surcharge|
|Rs 50 lakh to Rs 1 crore||10%||10%|
|Rs 1 crore to Rs 2 crore||15%||15%|
|Rs 2 crore to Rs 5 crore||15%||25%|
|Rs 5 crore and above||15%||37%|
(As illustrated by ClearTax)
With the revision in surcharge, the highest tax rate for individuals in income bracket of Rs 2 crore to 5 crore will increase from 35.88 per cent to 39 per cent. For individuals having income above Rs 5 crore, the tax rate will increase to 42.74 per cent, from existing 35.88 per cent.
"Three years back, there was only one rate of surcharge. Through the Finance Act, 2017, one more surcharge was introduced for the taxpayers earning above Rs 50 lakh and now, from assessment year 2020-21, Income-tax Act will have three slabs for tax rates and four slabs for surcharge," said Mr Wadhwa.
How effective will it be?
Some tax experts say the measures announced in Budget may not boost the government's tax collections significantly.
"The hike announced in surcharge will increase taxes for the high net worth taxpayers without adding significantly to tax collections," said Archit Gupta, Founder & CEO ClearTax.
"This can lead to tax arbitrage like situations, for example some of these taxpayers may choose to set up a Limited Liability Partnership (LLP) and then end up with an overall lower tax outgo, defeating the very purpose of this hike, if it was to increase collections," he said.
"A foreign investor usually invests in India through offshore funds which are established and operated as AOPs (Association of Persons) or Trusts, which are taxable at the same rate as applicable in case of individuals," added Dipen Mittal of Taxmann. "Hence, foreign investors would be hit by this proposal whether they invest directly in the Indian market or through offshore funds."
Income tax slabs, rates unchanged
Meanwhile, the government made no changes in the income tax structure. Here are the latest income tax slabs in case of an individual whose age is below 60 years:
|Net income range||Actual tax rate|
|Up to Rs. 2,50,000||Nil|
|Rs. 2,50,001 to Rs. 5,00,000||5.20%|
|Rs. 5,00,001 to Rs. 10,00,000||20.80%|
|Rs. 10,00,001 to Rs. 50,00,000||31.20%|
|Rs. 50,00,001 to Rs. 1,00,00,000||34.32%|
|Rs. 1,00,00,001 to Rs. 2,00,00,000||35.88%|
|Rs. 2,00,00,001 to Rs. 5,00,00,000||39%|
|Above Rs. 5,00,00,000||42.74%|
It however allowed an additional deduction of up to Rs 1.5 lakh against interest paid on loans borrowed till March 31, 2020 to buy houses worth up to Rs. 45 lakh, in a move aimed at pushing affordable housing.
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