Budget 2003 has given more than usual respect to individual taxpayers, recognised the situation of salaried class and given much more to senior citizens. It has proceeded to make the compliance of tax rules friendly, reduced unnecessary complications and made the process of filing taxes tech-savvy.

Standard deduction

Contrary to the recommendations of the Kelkar committee, there has been no reduction in income-tax rates or slabs. The Budget has not removed the standard deduction, instead it has raised it.

Standard deduction now will be 40 per cent of salary income, but capped at Rs 30,000 for income below Rs 5 lakh. For individuals with salary income of above Rs 5 lakh, standard deduction will be Rs 20,000 from nil currently. For a better picture, look at the table below:

There is no change in income-tax slabs or rates. Instead, the surcharge of 5% on income-tax levied in the last Budget has been withdrawn for individuals with income below Rs 8,50,000. Individuals with income above Rs 8,50,000 (this income is not taxable income but gross income before all deductions) will have to pay increased surcharge of 10% of income-tax payable.

Deduction for educational expenses

Adopting the noble cause of education, the finance minister has announced a tax rebate up to Rs 12,000 for expenses incurred for education of children of an assessee. While at the outset, this provision seems to benefit individuals, a closer look shows that the benefit under this new clause may not be available at all.

First, this is subject to the overall limit of Rs 1,00,000 eligible for rebate. Only individuals who have investments in life insurance payments, PPF contributions less than Rs 58,000 will be eligible to claim this benefit. Further, it may be recalled that rebate under section 88 is not available if taxable income is more than Rs 5,00,000.

Benefits for senior citizens

Senior citizens have been granted an additional rebate of Rs 5,000 from tax payable, raising the amount from Rs 15,000 to Rs 20,000. In simple words, this means that any person above 65 years of age will not pay any tax on income up to Rs 1,53,000. Those earning pension will also be eligible for standard deduction, thus will not be liable to tax for income up to Rs 1,83,000.

Further, income from interest on their savings will not suffer withholding tax, even if such income exceeds Rs 50,000. All they need to furnish is a simple declaration: this is surely a long way from obtaining certificates from income tax authorities and the accompanying harassment.

Receipts under VRS schemes

All receipts under VRS scheme up to Rs 5 lakh, whether received in lump sum or installments, is exempt from tax.

Dividend Income

Dividends have been made tax-free. This includes dividend from mutual funds. However, dividend paying companies will have to shell out an additional 12.8125 per cent of dividend payout as dividend distribution tax (mutual funds get an exemption for one year from payment of this tax for their equity-linked schemes).

It is important to note that while dividend is tax-free for receipts after April 01, 2003, increased benefit under section 80L is made effective retrospectively for income earned from April 01, 2002.

Royalty income

Royalty income received by authors of literary, artistic and scientific books up to Rs 3 lakh per annum will be allowed as deduction from taxable income. Further, royalty income from patent registered on or after April 01, 2003 up to a sum of Rs 3 lakh will be allowed as a deduction from taxable income.

Deductions for expenses on physically handicapped persons

An increased deduction of Rs 50,000 (raised from Rs 40,000) is being made available to a physically handicapped assessee under section 80U. In case of severe disability, deduction has been increased to Rs 75,000, deduction being limited to the income of the assessee.

For expenses incurred on medical treatment of a physically handicapped assessee or his dependent, a deduction of similar amount is available under section 80DD. In case the assessee or his dependent is above 65 years of age and is physically handicapped, an additional deduction of Rs 10,000 is available for such expenses.

Interest on small savings and PPF

Interest returns will continue to be affected due to reduction in rates. The return on PPF has been reduced by 100 basis points. This will also lead to reduction in rates of other small saving instruments. Reduced interest rates will adversely affect the income of retired persons.

To reduce some of this impact, the finance minister has announced a new scheme called Varishta Pension Bima Yojana to be managed by LIC, wherein a return of 9% per annum on the amount invested will be guaranteed. However, the maximum monthly pension is restricted to Rs 2,000 only.

Interest income becomes eligible for higher deduction. The deduction under section 80L has been increased by Rs 3,000, that is, from Rs 9,000 to Rs 12,000. Additional deduction of Rs 3,000 for income from interest on government securities continues.

It is important to note that while dividend is tax-free for receipts after April 01, 2003, the increased benefit under section 80L is made effective retrospectively for income earned from April 01, 2002.

Long-term capital gains on equity shares

Long-term capital gains on equity shares has been exempted totally from tax. This is applicable on all shares purchased after March 01, 2003 but before March 01, 2004 and held for at least one year before sale. This applies only to equity shares appearing in the list of the BSE 500 Index as on March 01, 2003, and where transactions are on a recognised stock exchange. This has currently has been made valid only for one year.

As per the Budget proposal, capital gains on shares purchased after March 01, 2003 and sold after March 01, 2004 will not be treated as income, hence not taxed.

Earlier, long-term capital gains from sale of equity shares were taxed at 10% (without indexation) or 20% (with indexation) and a surcharge of 5% on tax.

It has to be noted that this exemption comes under a new clause section 10(36). This means that if there are any capital losses on shares purchased after March 01, 2003, the assessee will not get any carry forward or set off benefits. Any gains or losses on the shares bought before March 01, 2003 will continue to be taxed as before.

An assessee will be required to keep separate accounts on equity shares purchased and sold after March 01, 2003. Also, this benefit applies only to equity shares. Preference shares, debt instruments, mutual fund units, will not benefit from this clause.

The minister also extended exemptions to equity shares allotted through public issue on or after March 01 this year and listed in recognised stock exchanges before March 01, 2004.

Exemption to sportspersons

In the face of demand to exempt sportspersons up to the age of 30 from paying income-tax, Singh announced deduction of up to Rs 75,000 from income received as professional fees to all sportsmen participating in games and sporting events.