FM Nirmala Sitharaman should consider taking a look at certain income tax exemption, deduction limits
Union Budget 2023 is just around the corner and once again the common man is eagerly waiting to see what’s in it for him from a tax deduction and exemption perspective.
In today’s times of rising prices and increased cost of living, the common man hopes that the Budget announcements would put some additional funds in his hands.
Such additional funds could be generated from measures such as increasing the basic exemption limit, lowering the tax rates, introduction of new exemptions or deductions for expenses and investments, and enhancement of monetary caps on existing deductions and exemptions.
In this article, we will analyse the monetary caps on various exemptions and deductions that were fixed many years ago and are long overdue for rationalisation, to make them more realistic in light of the high inflationary trends witnessed in the last few years.
Deduction under section 80C of the Income Tax Act, 1961
This is the most popular deduction among taxpayers with a wide range of eligible investment avenues within its fold.
Though the coverage for investments and expenses has widened over the years, the maximum deduction under Section 80C is capped at Rs 1.5 lakh, a limit which was fixed in FY2015-16 and has remained unchanged since then.
The government could, hence, consider increasing the limit of the deduction under Section 80C to Rs 2.5 lakh. This will not only help taxpayers save taxes, but also help boost investments in eligible avenues.
Deduction for children’s education costs
Section 10(14) of the Act, read with the relevant rules, offers a tax exemption in respect of children’s education allowance received from employers, to the extent of Rs 100 per month per child for a maximum of two children. A further exemption in respect of hostel expenditure allowance is available, at Rs 300 per month per child, for up to two children.
These limits were fixed in 1997 in consonance with the expenses one was expected to incur on children’s education and hostel requirements at that time. With education costs having increased manifold since then, these limits have lost their relevance in today’s times and need urgent rejig.
On the recommendation of the Seventh Central Pay Commission, children’s education allowance and hostel expenditure allowance for government employees were hiked to Rs 2,250 per month and Rs 6,750 per month respectively, with effect from 1 July 2017.
In keeping with these limits, the exemption caps should also be increased to Rs 2,250 per month per child for children’s education allowance, and Rs 6,750 per month per child for hostel expenditure allowance, to offer taxpayers meaningful relief in respect of such expenses.
Exemption in case of children’s income under Section 10(32)
The exemption in respect of a minor child’s income clubbed in the hands of the parent was first introduced in 1993. Since then, the limit has remained untouched at Rs 1,500 for each child, up to a maximum of two children. With inflation having eroded the value of money over the last 30 years, it may be appropriate to increase the exemption to at least Rs 10,000 per child to encourage parents to save for their children and secure their future.
Leave Travel Allowance (LTA) is an allowance paid to the employee by the employer for the purpose of travel. The mode of travel can be rail, air, or other public transport. It encourages an employee to go on a vacation with his/her family members.
The exemption under LTA can be claimed for two journeys in a block of four years and is only restricted to domestic travel. The exemption was first introduced in 1986, probably to facilitate employees’ travel during their leave period, to their hometown, once in two years.
Lately, with the steep rise in stress levels at work, family holidays at least twice a year have become the norm. In keeping with the current needs of taxpayers, revising the limit for exemption to ‘every year’ instead of twice in a block of four years, is more appropriate.
Furthermore, holidays to international destinations have now become commonplace. Hence, the exemption should be extended for international travel as well.
Section 80GG - tax deduction for rent paid
Section 80GG was introduced to provide relief to those individuals who do not receive any house rent allowance (HRA), but are paying rent for their stay. Under Section 80GG, a deduction capped at Rs 60,000 per annum (Rs 5,000 per month) is available in respect of rent paid by an individual who is not in receipt of HRA.
The rental cost a taxpayer incurs is definitely more than Rs 5,000 per month, especially in tier 1 cities. Hence, the government could consider revising the maximum limit from Rs 5,000 per month to Rs 25,000 per month, in at least tier I cities, if not across the board.
Tax-free limits on 'gifts' given by employer
It is not uncommon for employers to give gifts to employees on festivals and ceremonial occasions, such as wedding, childbirth, housewarming, milestone work anniversary of the employee, or to celebrate success or achievement of the organisation.
Such gifts from the employer are chargeable to tax as perquisites if the aggregate value of such gifts in a year is Rs 5,000 or more. The limit of Rs 5,000 was introduced in 2001 and has remained unchanged for 22 years.
Gifts up to Rs 50,000 a year from the employer to the employee are exempt under GST. It is therefore, time to revisit this limit under the Income Tax Act and bring it on par with the limit under the GST law, i.e., Rs 50,000 per annum.
Increase in deduction for interest on housing loan
After remaining unchanged at Rs 2 lakh since being hiked from Rs 1.5 lakh in FY 2014-15, it is time that the limit for deduction in respect of interest on housing loan, is raised to Rs 3 lakh, in line with the rising cost of housing and recent high interest rates.
This measure will not only stimulate demand in the housing sector, but will also provide relief to taxpayers on account of reduction in tax liability.
(Homi Mistry is a Partner with Deloitte India. Mousami Nagarsenkar, Director, Monil Gangar, Manager, and Swapnil Desai, Tax Senior with Deloitte Haskins & Sells LLP also contributed to the column).
