When there was an announcement of tax rebate for average Indian middle class under Union Budget 2017-18, Indians across the country cheered for the same. Honorable Finance Minister Mr. Arun Jaitley announced income tax rate cut from 10% to 5% for all those whose annual income is up to Rs 5 lakh annually. This move is likely to affect 2 crore tax payers across the country. The extra cash into their pocket can make them afford home loans EMI installments easily. Let us do some simple tax savings calculation on personal front –
|New Income Tax Slab||Old Income Tax Slab|
|Rs 0- 2.5 lakh - 0%||Rs 0- 2.5 lakh - 0%|
|Rs 2.5 lakh – Rs 5 lakh 5%||Rs 2.5 lakh – Rs 5 lakh 10%|
|Income||Tax Rebate on Home Loans||Remaining Amount||Taxable Income|
|9 lakh per annum||1,80,000 (Housing Loan Principal +Interest)||Rs 7,20,000/-||Rs 7,20,000- 2,50,000 (free) = Rs 4,70,000|
Tax before Union Budget Announcement
|2.5-5 lakh||10% of 2.5 lakh =Rs 25,000|
|5-7.2 lakh||20% of 2.2 lakh = Rs 44,000|
Tax after Union Budget Announcement
|2.5-5 lakh||5% of 2.5 lakh =Rs 12,500|
|5-7.2 lakh||20% of 2.2 lakh = Rs 44000|
Let me simplify this with an example. For an instance, Mr. Ajeet Kumar, a software engineer in Delhi earns Rs 9 lakh per annum. He has availed a home loan and has to pay EMI installments. The home loan EMI consists of - principal amount as Rs. 1, 50,000/- deductible under section 80C and interest amount as Rs 30,000/- deductible under section 24 of the Income Tax Act. The total claimed tax rebate is Rs, 180,000/- So, the remaining amount is Rs 7,20,000/-
As we know there is no tax obligation for amount upto Rs 2,50,000/-The taxable income will be Rs 4,70,000 (i.e. remaining amount). Prior, announcement of the Union Budget, the income tax was Rs 69000/-After the rate cut; the tax has been slashed to Rs 56,500/- (as mentioned in the above table).
The additional tax saving and interest cut by banks & lending institutions will encourage people to make an investment in the real estate sector and afford higher EMI easily.
Click here to calculate your home loan EMI
The union budget 2017-18 has also given small and medium enterprises (SMEs) a breather. One of the most significant developments for them was the reduction in income tax rate. Those SMEs whose annual turnover is below 50 lakhs have to pay only 25% instead of 30% tax. This move is expected to benefit 96% of the Indian companies, falling under this sector. It will increase the eligibility for loan against property (LAP) for SMEs.
Why SMEs should prefer LAP as compared with Business Loan?
Case Study that justifies LAP
A Kolkata based Tea Company net profit is Rs 40 lakh. Let’s see why LAP is beneficial for it -
Net Profit = Rs 40 lakh
When there was 30% tax, the revenue was 28 lakh after paying the tax to government
Now, there is 25% tax, the revenue will be Rs 30 lakh after paying the tax to government
Tax Profit = Rs 30 lakh – Rs 28 lakh = Rs 2, 000, 00/-
Thus, there is an increment in the profit after tax (PAT).
In the above said scenario, there is a (2/28)*100 =7% of increase in the PAT because of the new Tax limits.
Well in the case above, the business owner now has more liquidity compared to earlier scenario. More funds increase the value of the business. This is result; enhance the LAP eligibility and EMI affordability of the small and medium enterprises across the country.