The fiscal budget event is that time of the year when the expectation of consumers from the government on the personal tax front soars. The recent cuts in corporate tax rates have further raised the expectation of similar benefits being offered on the personal tax side as well. With the government’s priority areas also being to boost the demand for goods and services, leaving more disposable income in the hands of individuals may well be evaluated by the finance minister (FM) as one of the measures of achieving this objective.
Some of the key expectations on the personal tax front that the government may consider are as under.
Realignment of income slabs/tax rates
Income up to Rs 2.5 lakh per annum is currently exempt from tax (basic exemption limit) for individual tax payers up to the age of 60. This limit has remained constant since FY 2015. Current tax rates (5 per cent, 20 per cent and 30 per cent) applicable to different income slabs seem to be viewed as resulting in a spike in tax liability on incremental income above Rs 5 lakh. This is more so after the reduction of the lowest tax rate from 10 per cent to 5 per cent from FY 2018. Also, the maximum tax rate of 30 per cent is triggered at an income exceeding Rs 10 lakh per annum.
Last year, the interim budget provided some relief to an estimated three crore middle-class taxpayers (Interim Budget 2019-20, FM’s speech), by enhancing the rebate from tax to Rs 12,500, which effectively translated into payment of nil tax by individuals having income below Rs 5 lakh. No changes, however, were made to the existing slab of income and tax rates. Also, the subsequent Finance (No. 2) Act, 2019 presented in July 2019 maintained the status quo.
Hence, with the objective of enhancing the net disposable income, it may be considered whether the basic exemption limit can be enhanced to Rs 5 lakh itself. This would also need to be assessed basis the potential number of taxpayers (estimated at 3.5 crore) who may fall out of the mandatory tax return filing requirement.
Also, the limit at which the maximum tax rate of 30 per cent is triggered may also be increased to Rs 20 lakh per annum. Subsequently, the other slab rates can be adjusted basis the revised limits in line with the progressive tax rate system that India has always adopted.
Recalibration of enhanced surcharge high earners
For individual taxpayers, surcharge was enhanced to 25 per cent and 37 per cent for those having taxable annual income above Rs 2 crore (up to Rs 5 crore) and above Rs 5 crore respectively, from 15 per cent, with effect from FY 2020. This has resulted in a maximum marginal rate of 39 per cent and 42.744 per cent, respectively, being applicable to such category of individuals. Given the small base of super-rich individual taxpayers (0.18 per cent taxpayers reported total income more than Rs 1 crore and above in FY 2018, according to income tax statistics released by the CBDT for AY 2018-19), this measure may not aid in garnering significant revenue for the government and, at the same time, is likely to have higher tax outgo, especially by entrepreneurs of successful businesses/start-ups and highly qualified Indians, etc.
Increase in deduction for interest paid on housing loans
Currently, the income-tax deduction towards interest paid on a home loan, on a self-occupied property, can be claimed up to a maximum of INR2 lakh per annum. Most individuals find this limit quite low vis-à-vis cost of capital, which has increased manifold over the years and continues to be high despite recent reduction in the repo rate by the Reserve Bank of India. With effect from FY 2020, a welcome change was that relief was allowed to taxpayers wherein they can hold two self-occupied house properties and no notional rent would be apportioned towards the second housing property. The aforesaid deduction of INR2 lakh, however, stands unchanged, which many home buyers perceive as causing hardship as interest outgo is higher than this limit. Therefore, it is hoped that the FM may consider doubling the limit to INR4 lakh per annum.
Extension of additional deduction for affordable housing
An additional deduction of up to Rs 1.5 lakh per annum was introduced with effect from FY 2020, for first-time home buyers in respect of interest payable on a housing loan sanctioned during the period April 1, 2019 to March 31, 2020 with stamp duty valuation of the property not exceeding Rs 45 lakh. Many real estate sector experts argue that this threshold is low as compared to cost of buying a house in a metro city or tier 1 city. Also, one of the stipulated conditions for availing of such additional deduction is that a loan shall be sanctioned during the period between April 1, 2019 and March 31, 2020, i.e., during the current financial year only. Thus, anyone who avails of a housing loan after March 31, 2020 would not be eligible for such deduction, which may contradict the stated objective of the government of achieving housing for all by 2022.
The stamp duty value of the house property for said additional deduction may be enhanced from Rs 45 lakh to Rs 65 lakh at least for metro cities and certain tier 1 cities (e.g. Bengaluru, Hyderabad, Pune) to incentivise the purchase of an affordable house across India. Furthermore, the period during which loan shall be sanctioned for availing of the said deduction may be extended for first-time home buyers in FY 2021 as well.
Increase in deduction u/s 80C
Deduction under Section 80C of the Income-tax Act, 1961 is Rs 1.5 lakh per annum for various common tax-saving investments/expenditure such as employee provident fund, public provident fund, principal repayment of housing loan, children’s tuition fee and national savings certificate. This limit has remained constant for the past five years. Keeping in mind the overall rise in the inflation rate, the government may hence consider increasing this to Rs 3 lakh per annum to provide impetus to consumer spending to spike demand and also encourage individuals to meet their long-term savings goal. Alternatively, a separate deduction may be introduced, in addition to the proposed enhanced limit, for certain high-value transactions such as children’s tuition fee (keeping in mind the spiraling education cost over the past few years) and specified term deposits for not less than five years, etc.
Enhancement in limits for various exempt allowances
Certain exemptions are allowed to individual tax payers but the thresholds may not be in sync with the actual expenditure incurred. Therefore, these limits may be enhanced bearing in mind the current inflation rates — say children’s education allowance limit from Rs 100 to Rs 500 per month per child, children’s hostel allowance limit from Rs 300 to Rs 1,500 per month per child and meal vouchers from Rs 50 to Rs 100 per meal. Also, the FM may consider enhancing the limit of standard deduction from Rs 50,000 to at least Rs 75,000.
While formulating the individual tax-related proposals for budget 2020, the government will have various objectives to fulfill, including creating a robust regulatory framework, further improving ease of compliance, continued use of cutting-edge technology as well as widening the tax base. Every proposal also has an impact on the tax-GDP ratio. It is a daunting task for the FM to strike a balance between fiscal consolidation and resources at the government’s disposal vis-à-vis the aforesaid expectations of consumers.(Partner and Head, Global Mobility Services - Tax, KPMG in India)