Tax disadvantage after Rs 5.10 lakh

Budget 2007 provides for increase in basic exemption limit of Rs 10,000 for personal income tax. The basic limit for women assessees has been enhanced to Rs 1.45 lakh and for senior citizens the limit has been pegged up at Rs 1.95 lakh. For regular taxpayers, individuals or HUFs, the basic income limit has been enhanced to Rs 1.1 lakh.

A new cess called "secondary and higher education cess" at 1 per cent of the tax (which means tax plus surcharge) has been introduced in this Budget. For individual taxpayers with income above Rs 10 lakh the maximum marginal rate of tax would be 33.99 per cent. Tax disadvantage sets in after the taxable income exceeds Rs 5,10,000.

In the case of taxpayers with income above Rs 10 lakh, the increase in basic limit has no impact owing to the `senior and higher education cess'.

The saving for taxpayers is not even Rs 1,000, and in respect of senior citizens the tax benefit is not really Rs 2,000 but much less.

Small and medium enterprises: In Budget 2007 surcharge has been withdrawn in the case of small partnership firms and corporates with income less than Rs 1 crore. For these companies, the effective tax rate has been reduced from 33.66 per cent to 30.90 per cent, resulting in tax relief of 2.76 per cent.

Tax on ESOPs: Shares allotted by companies to employees as sweat equity is not chargeable to tax as salary income at the time of allotment. The employer too would not have paid any tax on such allotment. Budget 2007 seeks to adopt the fair market value of the shares allotted to employees as chargeable to fringe benefit tax. However, when an employee transfers such shares the value subjected to fringe benefit tax earlier will be adopted as the cost of acquisition. Both Section 49 and Section 115-WB have been subjected to consequential amendments.

Educational loan repayment: Section 80-E relating to repayment of education loan has been extended for repayment of loan taken by the assessee for higher education of his relative (spouse and children). Currently onlyloan taken for higher education of self is eligible for deduction upon repayment. The Budget 2007 has extended the tax incentive in respect of loan repayment relating to education of relative. The term `relative' covers spouse and children of the taxpayer.

This is a welcome amendment as, in most cases, the borrower may not have an income and can start repayment only after completion of education. Now parents may opt to pay the education loan of children and thereby gain reduction in tax liability. Taxpayers now have some scope for tax planning in view of this change.