After demonetisation pain, will Arun Jaitley offer tax balm for common man?

With all that is happening in the country – demonetisation and its impact, the ups and downs in Goods and Service Tax (GST) implementation, the upcoming elections in various states ? Finance Minister Arun Jaitley has have a tough job trying to balance expectations of individual taxpayers and maintaining economic growth in Budget 2017.

Here are some of the personal income tax expectations:

Tax rates

The basic tax exemption limit is currently set at Rs 2.5 lakh, which means that income up to this limit is not subject to income tax. In the last few years, there has been a trend to increase the basic exemption limit marginally – though there was no change in the last budget. To provide incentive to common man, there is an expectation that the basic exemption limit may be raised to Rs 3.75 lakh or Rs 4 lakh this year. This will provide additional disposal income in the hands of the taxpayer which will help boost expenditure and consumption. As seen globally, it could broaden the tax base and make people more compliant.

Exemption for specified allowances

Under the income tax law, exemption from tax can be claimed for certain specified allowances / benefits that the employer provides to its employees. However, there has not been much change in prescribed limits of these exempt allowances/ benefits for a long time. Keeping in mind rising inflation, the government may raise the current exemption limit of various allowances such as

Arun Jaitley, Union Finance Minister. Reuters

transport allowance from Rs 1,600 to Rs 5,000 per month and children education allowance from Rs 100 to Rs 1,000 per child per month. The current exemption limit for medical reimbursements of Rs 15,000 per month may also be increased to Rs 50,000 to help cope with rising medical and healthcare costs.

Due to increase in the cost of living in non-metro cities such as Gurgaon, Noida, Bangalore, Hyderabad etc., the government may increase the current limit of house rent allowance (HRA) exemption of 40 percent of salary for non-metro cities to 50 percent, bringing the limit at par with that of metro cities.

These tax exemptions will bring a salaried taxpayer at par with businessman or professional who is allowed deduction for all business related expenses like travel, car fuel and driver’s salary, client entertainment expenses, etc.

As an alternative to increasing these exemption limits for specified allowances, the Government may look at bringing back standard deduction for salaried taxpayer which allows a lump-sum fixed deduction from salary income towards various expenses incurred by an employee.

Housing for all: The Prime Minister in his New Year’s Eve speech gave a hope to the common man to have a home in its own name. Taking cue from his speech, the Government may increase the deduction available on interest paid for housing loan on self-occupied house property from the existing limit of Rs 2 lakh to Rs 2.5 lakh or more per annum. This could provide impetus to individuals to look at housing as an investment option and generate demand for housing in the economy.

Savings: The deduction limit under Section 80C may be increased from Rs 150,000 to Rs 200,000 to encourage household savings in the form of public provident fund, National Savings Certificates, 5-year Fixed Deposits, etc. This may in return stimulate long-term savings and provide additional pool for the government to curb fiscal deficit. Further, the government’s continuous focus on infrastructure development in India may lead to reintroduction of deduction on subscription of long-term infrastructure bonds under Section 80CCF.

Social security through National Pension Scheme (NPS): As seen in previous budgets, NPS has been the prime focus of the government to boost savings and provide social security to individuals. In order to encourage individual taxpayers to make higher voluntary contributions towards NPS, the government may make the scheme more attractive by making NPS withdrawal 100 percent exempt from tax. This would be in line with other retirement schemes like Employee Provident Fund and Public Provident Fund. Also, the government may increase the additional deduction for contribution towards NPS to Rs 100,000 from the existing limit of Rs 50,000.

Special focus towards Beti Bachao Beti Padhao: In order to boost the ‘Beti Bachao, Beti Padhao’ campaign forward, the Government may consider de-linking deduction for educational expenses for children from Section 80C and provide a separate provision especially for the girl child. This could be done with an aim to provide encouragement to parents of girl child to provide her education and towards greater good of the society.

Reporting requirements: Demonetisation and amnesty schemes were focussed efforts of the government to curb black money and unearth the untaxed income. While that is in progress, the Government may bring in multiple reporting and tracking measures in the Budget 2017 to track and match expenses with income.

The income tax return form already requires disclosure of foreign assets by resident individuals and disclosure of assets and liabilities by individuals with total income exceeding Rs 50 lakh. Additional reporting requirements may be introduced this year. A common man expects that there should be clarity on these reporting requirements and that there should be no hardship from tax office for a tax compliant individual.

This year will record “several firsts” for the government ? the multiple amnesty schemes, demonetisation, new date for presentation of budget, rail budget to be presented along with fiscal budget, etc. Budget is an annual fiscal document focussed on balancing income and expenditure of the Government – while some tax sops come along the way and are welcome, one must remember that this is not the sole objective of the budget. With only a few days left, the stage is all set, the curtain is about to rise and we all await Budget 2017.

(The writer is Tax Director, People Advisory Services, EY India)

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