The cut in personal income tax is quite likely as the government may want to increase purchasing power of and consumption by individuals, to boost demand in the economy
1. Rejig of tax slabs and tax rates
With high of cost living and rising prices, there is high expectation by individuals that the government would take adequate measures to increase their disposable incomes, so as to meet their consumption requirements and plan for future savings.Suggestions:
> Keeping in view the cost of living trend in the economy, the government could consider increasing the minimum slab limit for the amount not chargeable to tax, from Rs 2,50,000 to Rs 5 lakh. The limit was last raised in Budget 2014, which was six years ago.
> Similarly, the slab rate of Rs 10 lakh for levy of the highest tax rate of 30 percent, can be increased to Rs 20 lakh. This may be accompanied by a new slab for Rs 10 to 20 lakh at a 20 percent tax rate and the 10 percent tax rate could be re-introduced for the Rs 5 to 10 lakh income slab.
> Keeping inflation rates in view, the Finance Minister could consider increasing the tax slabs and also bring down the tax rate by 5 percent making the maximum slab rate at 25 percent. This would leave some more money at the disposal of the common man.
> A cut in personal tax is one of the most popular and long pending demands of salaried individuals considering rising cost of living standard and inflation.
> This is quite likely, as the government may want to increase the purchasing power of and consumption by individuals to boost demand in the economy2. Restructure of 80C
> Focus on savings / investments
> Expenditure outside the purview
> Raise the limit
> Infra bonds: Re-introduction of deduction in respect of subscription to infrastructure bonds by individuals. This will also help the government to mobilise funds for investment in infra sector and thereby boost the economy.
It is recommended that the benefit under section 80CCF be reintroduced to promote raising of funds for infrastructure development with a maximum deduction up to Rs 1 lakh.
> Additional saving through increase in 80C limit: The deduction under Section 80C has remained static since Finance Act, 2014. The section is meant to provide relief to individuals for specified investments and expenditure, while at the same time channelize investments into areas that support the economy.
However, over the years, the scope of this deduction has become too wide as compared to its very modest limit such as – life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, tuition fees, principal repayment of housing loan, etc.
It is expected that there will be an increase in these limits in line with the increased cost of living. Currently, Section 80C allows a maximum deduction of Rs 1.5 lakh from the gross total, which generally gets exhausted through Provident Fund (PF) contributions, tuition fee expenses, payment of housing loan principal and life insurance premium.
As such, the exemption limit under Section 80C can be enhanced from Rs 1,50,000 to Rs 2,50,000 which would provide tax savings in the range of Rs 20,000 to Rs 30,000 depending upon the level of income.
Alternatively, it should carve out a separate deduction for expenses such as children’s tuition fees, life insurance premium and housing loan principal payments as compared to the investment-oriented items in that scope.
> Standard Deduction – Increase in SD for salaried tax payers as limited avenues for tax breaks for salaried class
As per an important data point that was shared in the 2018 Budget speech which reflects Indian situation, individual business taxpayers (including professionals) paid an average tax of only Rs 25,753 each as compared to Rs 76,306 from the salaried taxpayer.
Hence, there is a need to increase the standard deduction of Rs 50,000 to at least Rs 1 lakh to take care of the salaried employees increasing expenses like increase in cost of the petrol/diesel, cost of food, medical expenditure, etc.3. Boost to realty sector:
a. Affordable housing benefit
b. Interest deduction for let-out property
> Additional investment in the real estate sector: Government’s motto is to provide housing for all. To boost the real estate sector, the government should consider enhancing the limit for deduction of interest paid on housing loan to Rs 3 lakh in case of a self-occupied property which would not only provide tax savings but also promote the housing sector.
Budget 2017 had limited the amount of housing loss that could be claimed in the same year to Rs 2 lakh, and provided for carry forward of the remaining loss for eight years for set-off against the house property income. The Government should consider either increasing the limit to Rs 4 lakh that could be claimed in the same year against any head of income or reinstate the provision which existed prior to Budget 2017 (i.e. allow full deduction in case of let out property)
The rationale is that if the taxpayer does have not positive house property income during the following eight years for set-off, the loss brought forward would lapse and the taxpayer would lose the tax benefit in total.
This has restricted Investment in real estate as the amount of interest paid is always higher than the rental income.
> Additional deduction of Rs 1.5 lakh was provided to first time home buyers in the Finance Act 2019. One of the conditions to avail this benefit is that the stamp duty value of such property should not exceed Rs 45 lakh – this denies full usage of the benefit of additional deduction of Rs 1.5 lakh as the middle-income group taxpayers even in Tier-2 cities may not qualify for such a deduction owing to higher housing costs.
As such, the ceiling on the cost of the house needs to be significantly enhanced to derive the full potential of the benefit i.e. raise the limit of the value of the house and also the period for taking a loan should be extended up to March 31, 2021.
4. With growing internationally mobile population, the growing need to look at issues faced by such class of employees e.g. – FTC at withholding stage, ESOP taxability for multi country services
> Taxation of employees stock options
- Currently, stock options are subject to tax at the time of allotment of shares, taxable value being excess of fair value of shares over the exercise price.
When an employee takes up assignments outside India, the benefit from stock options has to be prorated based on the assignment tenure in each country during the vesting period. In case of mobile employees who qualify as Non resident or Resident but not ordinarily resident who exercise stock options, only pro-rata value in respect of days spent in India during the period grant to vest should be subject to tax in India based on OECD commentary and various judicial precedents.
This principle is not expressly stated in the income tax laws. Hence, some companies reduce taxes on the entire income instead of income only attributable to the India service period. This increases the tax outflow for the employee. Explicit provisions in income tax laws can remove such ambiguity. It is recommended that the Act should specifically provide for prorate taxation in respect of mobile employees who qualify as NR or NOR.
- The valuation basis for stock rewards where the stock is on an overseas stock exchange, is also complex and is arrived at based on a Category I merchant banker’s certificate. Adopting stock price from an overseas stock exchange could help ease the procedural complexity.
> FTC credit at withholding stage
The individuals being sent from India to overseas is significant and needs focussed attention in terms of tax relief, avoidance of double taxation and procedural relaxation. Over the past few years, there have been additional compliances, especially with respect to reporting of overseas assets, and claims of treaty relief.
Official foreign travel typically results in compliance in more than one country. Taxation is triggered based on the country of residence and/or source.
Employers should be able to claim credits for taxes paid in the overseas location as part of the payroll process and the tax laws and rules should provide a framework to do the same to avoid disputes. Under current laws, these are not expressly provided.
The law should specifically provide for claiming FTC at withholding stage for individuals who qualify residents and ordinarily resident of India. Such a process would avoid claiming of refund at the tax return stage and avoid cash flow issues to the individual
5. Enhance the LTCG exemption for equity investments
Current LTCG exemption for equity investments of Rs 1 lakh is too low as many individuals are holding MF investments for many years. To incentivise retail investments into equity MFs, the government could consider increasing the limit of Rs 1 lakh to Rs 2 lakh to encourage tax payers to make investment in capital market for holding beyond say 2 years (other situations exceeding such limits can continue to be taxed at 10 percent)
6. Deduction on contribution to National Pension Scheme (NPS) –
> An additional deduction of Rs 50,000 is allowed on self-contribution towards NPS for those who have exhausted the limit of deduction of Rs 1.5 lakh under Section 80C. Considering the returns and additional tax benefit which NPS provides, it is an attractive investment option for a taxpayer. The government could consider raising the limit of Rs 50,000 to Rs 1 lakh which will encourage the investor to save more for retirement and help in further increasing the popularity of the scheme.
> The contribution by employer to NPS up to 10 percent of basic pay of the individual, is deductible. NPS for the government sector was increased to 14 percent last year - a similar increase is expected for the private sector as well.
7. Increase deduction limit for health insurance
Healthcare costs continue to rise and hence people need a higher health insurance cover.
The government may consider increasing the investment limit in respect of payment towards health insurance premium under section 80D from Rs 25,000 to at least Rs 50,000 for self and family, and for senior citizens dependent parents from Rs 50,000 to at least Rs 75,000.
(The author is Partner at Deloitte India.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.