Overall, Budget 08-09 offers the aam taxpayer many benefits. No doubt, Finance Minister P Chidambaram has done his bit in preparing a favourable pitch for the upcoming general elections. Be that as it may, it's some relief in a year when the invisible tax called inflation is threatening to unhinge household budgets.

The following are the important proposals which impact the aam taxpayer. All these proposed amendments apply to FY 08-09 and subsequent years, unless otherwise specified.

Tax saving through shuffling of income tax rates and thresholds

In the case of every individual, HUF, etc, the threshold of income under which no tax is leviable has been increased by Rs. 40,000 from Rs. 1,10,000 to Rs. 1,50,000. There is no change in the income tax rates, cess and surcharge. However, there have been significant beneficial changes in the tax slabs as follows:

Thus, you stand to save at least Rs. 4,000 if you earn Rs. 1,50,001 a year -- and Rs. 44,000 if your annual income is Rs. 5,00,001-- and even more on annual incomes higher than that.

The benefit to women and senior citizen assesses is even greater as the threshold in the case of a woman assessee has been raised by Rs. 35,000, i.e. from Rs.1,45,000 to Rs.1,80,000, and in the case of a senior citizen by Rs. 30,000, namely from Rs.1,95,000 to Rs.2,25,000.

All the other provisions related with the surcharge and cess remains unchanged.

Reverse Mortgage Scheme -- Looking after the baghbaan

The popular film of 2005, Baghbaan (meaning gardener, the one who raises flowers), depicted the story of the sufferings of a retired couple who spent all their savings on raising their children. Once well settled, the self-centred children had little inclination to help their senior citizen parents, or look after them with love and understanding. As it happens in films, the protagonist played by Amitabh Bachchan is able to write a bestselling book that solves all his financial problems.

Realizing perhaps that life may not always emulate the dream world of films, the government last year launched the reverse mortgage scheme, which can provide both financial security and an independent life to the Baghbaans.

This scheme was launched with the intention to secure a stream of cash flow for the senior citizens against the mortgage of a residential house and not to alienate the property. However, the scheme did not take off because of lack of clarity in some aspects. Now, Sec. 10(43) has been inserted to provide that such loan amounts will be exempt from income tax. Sec. 47(xa) has also been inserted to provide that any transfer of a capital asset in a transaction of reverse mortgage shall not be regarded as a transfer and therefore shall not attract capital gains tax. The borrower (or his legatees) will be liable to tax on capital gains only when the mortgaged property is transferred by the mortgagee for recovering the loan.

Unfortunately, the authorities have neglected to deal with the treatment of tax on accrued interest in the hands of the lender.

The amendment shall apply retrospectively from FY 07-08.

Two more tax saving investments -- Enlargement of the scope of Section 80C

The Budget confirmed the extension of the benefit of Section 80C to investments in 5-year Post Office Term Deposits (POTD) and 5-year Senior Citizens Saving Scheme (SCSS). However, any principal amount withdrawn from such accounts before the expiry of 5 years shall be liable to tax, unless it is received by a legatee or nominee on the death of the investor.

The amendment shall apply retrospectively from FY 07-08.

Additional deductions on medical insurance for parents -- Section 80D

At present, a deduction of up to Rs. 15,000 is available to an individual or HUF in respect of payment to effect or keep in force an insurance on the health of the assessee or on the health of the wife or husband, dependent parents or dependent children where the assessee is an individual and the health of any member of the family where the assessee is an HUF. In case the assessee or any other member of the family on whose health the insurance has been effected or kept in force is a senior citizen, the deduction allowed is up to Rs. 20,000.

It is now proposed to allow an additional deduction of up to Rs. 15,000 to an individual, on any payment made to effect or keep in force insurance on the health of his parent or parents, unless they are senior citizens. The existing condition of 'dependent' with respect to parents is being dispensed with.

Payment of the premium can be made by any mode other than cash instead of only by a cheque as per the present provisions.

For example, an individual assessee pays medical insurance premia as under:

• Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and dependent children and
• Rs. 17,000 to keep in force an insurance policy on the health of his parents.

Under the new provisions he will be allowed a deduction of Rs. 27,000 (=12,000 + 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (=12,000 + 17,000).

Further, in the above example, if cost of insurance on the health of the parents is Rs. 30,000, out of which Rs. 17,000 is paid by the son and Rs 13,000 by the father, who is a senior citizen, out of their respective taxable income, the son will get a deduction of Rs. 29,000 (= 17,000+12,000) and the father will get a deduction of Rs. 13,000.

If it were one policy and the total premium of Rs. 40,000, he should get deduction of Rs. 40,000 - Rs. 20,000 since the policy covers a senior citizen and additional Rs. 20,000 because he is paying a premium for his father who is a senior citizen. I hope to FM that I am right.

It is obvious that this amendment is useful only in those cases where the parent is not already a senior citizen. Otherwise, it is impotent.

I wonder if any of the insurers would accept applications for such a high insurance target amount for the parents, leave alone the senior citizens.

Increase in tax rates for short term capital gain

Tax on short-term capital gain arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund, where such transaction is chargeable to STT has been increased to 15% from 10%. Sec. 195 has been modified to increase the rate of TDS to 15% for NRIs.

In his Budget Speech, the FM observed that there is merit in equating the tax rates on dividends that are distributed taxed @15% to short-term capital gains taxed @10%.

Sorry, neither the market players nor I saw any merit in this logic. Post-budget, the market crashed substantially.

(Excerpt from Taxpayer to Taxsaver (FY 2008-09) by A N Shanbhag and Sandeep Shanbhag, bestselling authors and widely syndicated columnists on personal finance and taxation)

Published by