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Budget 2014 Direct Tax Summary: Almost Like There Was No New Government


The Budget Highlights are here, in a quick summary. We’ll warn you: it’s almost like there was no new government. We’ve seen some minor changes.


What you care about

  • Your taxes go down because of an increase of the base slab of 250K versus 200K (another 50K for senior citizens)
  • An increased 80C limit on investments upto Rs. 1.5 lakh
  • Housing loan interest, when you occupy the house, is exempt upto Rs. 200,000 per year. (Higher by Rs. 50K)

Mutual Funds Hit

  • Debt funds have to be held for 3 years to qualify as long term assets. This hits mutual funds very hard! (Full article coming soon)
  • For non-equity funds there was a microscopic dividend arbitrage, by charging dividend tax on the actually amount distributed instead of the “distributable surplus”. This has been bridged.
  • In effect, earlier if you distributed Rs. 85 as dividend, you would pay 15% of that, or Rs. 12.75 as tax. Now If you distributed Rs. 85, they assume you have Rs. 100 to distribute, so you must pay Rs. 15 as dividend tax. This has a big impact on mutual fund dividends, both debt and equity.
  • You had a lower tax of 10% on all gains of debt fund units. Now this is available for all other such listed securities or bonds, not just mutual fund units.

Government Finances

  • They’ll make 9.77 lakh cr. as tax revenue, and 2 lakh crores as non-tax revenue, taking us to nearly 12 lakh crore of government revenue (Up 15%)
  • Expenditure goes up by 12.6% to 17.9 lakh cr.
  • Fiscal deficit of 531,177 cr. which is 4.1% of the GDP, which therefore pegs GDP at 130 lakh crore.
  • This is going to be tough.
  • FY17 target of 3% fiscal deficit.
  • Stop laughing. But at least they have a goal.

Stop Smoking

  • Excise duty on tobacco upped from 11% to 72%
  • What other incentive do you need?


  • Upped from 26% to 49% in defence
  • Upped from 26% to 49% in insurance
  • Nothing about retail.


  • We know what happened with MFs earlier in this post.
  • Real Estate Investment Trusts (REITs) and Infra Investment Trusts (Invits) get pass-through treatment. Good for investors resident abroad, and for Indians who can pay lower capital gains taxes.
  • 15% of money spent in buying plant and machinery by manufacturers is allowed as a deduction for Rs. 25 crore or more (last year: Rs. 100 cr. or more). And extended to 2017.
  • 100% of expenditure deduction on capital assets of certain businesses like warehouses, hospitals etc. continues; adds semiconductor fab units and iron ore pipelines as new businesses.
  • Infra bonds issued to foreigners had only 5% withholding tax on interest paid. Now that’s been extended to all bonds (infra or not) that are long term. Applies till 2017.
  • FII/FPI investors were told the money they earn is business income, even if it should be capital gains. Now it definitely is capital gains. (Clarified)

Tax Policy Easing and Loophole fixes

  • Advance rulings available to residents too (earlier only for non-residents)
  • Remember the Cost Inflation Index? It’s what you use for Capital gains inflation indexation calculations. It will now be based on the “new” CPI, not a quasi index which was used earlier. Doesn’t change your life much.
  • Another loophole was removed where you could invest capital gains in 54EC bonds (like NHAI) over two years if you sold in the second half of the year, and get a Rs. 1 crore exemption. Now that loophole has been removed; you get just Rs. 50 lakh.

Don’t Claim Cap Gains on TWO Houses

  • I complained about the concept that you can invest capital gains of anything into a residential house.
  • Now it seems you can do this but only invests proceeds in one such house, not two.
  • This doesn’t help the bubble, but apparently there are many cases pending where people buy two houses and claim cap gains exemption on investment in both of them. End of that story.

CSR Is Not Deductible

  • Large companies must spend 2% of all profits on Corporate Social Responsibility. Companies wanted to deduct this spend from profits for tax purposes. But the Budget says no, it can’t be deducted – you have to pay it from post-tax profits.

More on indirect taxes and the rest of it later.


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