NEW DELHI: Since the cost of living has shot up due to sticky inflation this last year, the government may increase the tax-free slab to Rs 5 lakh in the two-year-old alternative personal income tax regime in a bid to increase disposable income and revive the demand cycle.
As per existing laws, an individual is required to pay tax in case his taxable income in India surpasses the basic exemption limit. The general exemption limit is Rs 2.50 lakh per year. The tax liability under the previous personal income tax system decreases if taxpayers utilise tax exemptions like Section 80C and Section 80D. However, the alternative tax structure does not offer any benefit from deductions of any kind.
Last month, Confederation of Indian Industry (CII), the country's leading business organisation, proposed an overview of the personal income tax rates. It suggested that taxes be waived up to Rs 2.5 lakh and that the rates between Rs 2.5 lakh and Rs 5 lakh be reduced from 5% to 2.5%.
Now, Deloitte India has come up with a list of budget expectations on the personal tax front.
1. Revise tax slabs As per the current income tax provisions, an individual is required to pay taxes based on slab rates. The highest slab rate (after including surcharge and cess) for income exceeding Rs 5 crore in India is at present 42.744 percent.
"The tax rate for individuals has not been changed since the FY2017-18 (new tax regime bought in FY2020-21). Hence, to give more purchasing power to individuals and some relief to the employed taxpayers, the highest tax rate of 30 percent should be reduced to 25 percent and the threshold limit for the highest tax rate be increased from Rs 10 lakh to INR 20 lakh. Therefore, the proposed highest slab rate (including surcharge and cess) can be reduced to 35.62 percent," said Tapati Ghose, Partner at Deloitte India.
Revision of tax slab rates could be as follows:Applicable surcharge and educational cess will be levied on the above.The highest tax rate in neighbouring countries are as follows:Hong Kong – 17 percent
Singapore – 22 percent
Malaysia – 30 percent
Hence, it is recommended that India should ensure that tax rates fall in that range.
Expectation #2: Increase in the limit for various deductions • At present, deduction available under the following sections are as follows:
– Section 80C of the Act for payments/investments towards life insurance premia, contributions to provident fund, subscription to certain equity shares or debentures, etc., is capped at Rs 1,50,000.
– Section 80D deduction in respect of health insurance premium is capped up to Rs 25,000/ 50,000.
– Section 80TTA deduction of up to Rs 10,000 in the hands of individuals and Hindu Undivided Family (HUF) in respect of interest on savings account with banks, post offices, and co-operative societies carrying on the business of banking.
– Section 80EEA deduction in respect of affordable housing – One of the conditions mentioned is that the loan should be sanctioned between April 2019 and March 2022.
– 80EEB deduction in respect of purchase of electric vehicle – This deduction was available only if loan has been sanctioned by the financial institution from 1 April 2019 to 31 March 2023.
• Section 80C
The current limit mentioned above seems quite low. With the increase in cost of living and inflation, the government should look at increasing the limit under Section 80C. This will have two-fold benefits, viz., individual taxpayers would be willing to save more and will benefit from a lower tax outgo, thereby increasing disposable income to meet the increase in price of various commodities.
• Section 80D
Considering the increase in costs of medical treatments, the cost of comprehensive insurances has increased manifold and hence, the erstwhile limit under this section may be revisited.
• Section 80TTA
It is unlikely that salaried individuals would keep their entire savings in a savings bank account, which earns a much lower rate of interest compared with term deposits. They may transfer some portion of their savings to term/recurring deposits in banks to earn comparatively better returns.
• Section 80EEA
With the rise in demand for residential real estate in metropolitan and tier-II cities in the post-COVID world, it is expected that the deduction be extended.
• Section 80EEB
Demand for electric vehicles is increasing each day. The government has brought in provisions to provide deduction in respect of interest payable on loan taken to purchase electric vehicle. However, the condition for availing loan to purchase electric vehicle is until 31 March 2023.
• It is recommended that the government should increase the deduction limit as follows:– Section 80C – INR 2.5 lakh
– Section 80D – The limit to be increased to INR 50,000/1,00,000. Section 80TTA – Interest on all types of bank deposits (such as
Fixed Deposit Receipt [FDR]) should be included within the scope of Section 80TTA. The limit should be increased from INR 10,000 to INR 50,000.
– Section 80EEA – The condition for availing loan should be extended for at least three years, i.e., until 31 March 2025.
– Section 80EEB – The condition for availing loan for purchasing electric vehicle should be extended for at least two years, i.e., until 31 March 2025.
Expectation 3: Increase in the limit for various deductionsBudget 2020 provided that employer contribution to Recognised Provident Fund (RPF), superannuation, and National Pension System (NPS) exceeding Rs 7,50,000 will be taxable in the year of contribution.
• Section 17(3) of the Income tax Act, 1961 (the Act) provides for taxability of funds received from provident fund if certain conditions outlined in the fourth schedule (i.e., not rendering continuous service of five years, etc.) are not complied with.
• In case of contributions by employer in excess of limits specified, the excess contribution and the accretions thereon is taxable in the hands of the employee.
• The same provident fund balance when withdrawn would be subject to tax withholding, if the conditions for exemption (for example, five years of continuous service) are not complied with and there is no specific exemption provided for excluding the income already taxed (mentioned above). Hence, there could be double taxation at the withdrawal stage to the extent the contribution/accretion has already been taxed.
• It is recommended that there should be a specific provision in the Act, providing exemption in respect of contributions/accretions, which are already taxed under Section 17(2)(vii) at the time of provident fund withdrawal.
Policy recommendations After the pandemic, the working culture across organisations has undergone several changes. Organisations introduced work from home, remote working, hybrid working, etc. However, there are no policies/guidance with respect to various provisions (such as tax, social security, insurance, workman compensation) on account of the new remote work culture. Therefore, the government may look at announcing certain guidance/policy-related aspects.
• Some organisations permit moonlighting to its employees. The government should look at providing a notification that clarifies on tax implications on this aspect.
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