Income Tax Expectations of July 2014 India BudgetIt is not an easy task to manage one's household budget. A large section of our population in urban and rural India faces this dilemma every month. Though the income levels and economic opportunities have increased since India opened up its economy to foreign investment in early 1990’s, the last few years have particularly been tough with relatively static income levels and rising inflation.
In spite of the above challenges, the households in the country have a lot of expectations from this year's budget, as they look forward to some meaningful positive change in their day- to- day lives. First and foremost, there is a need to bring in a change in the approach and day- to- day functioning of the tax administration.
Interestingly, the recent report submitted by Parthasarthi Shome on Tax Administrative Reform Commission (TARC) highlights this need. TARC has recommended that the tax administration should adopt a “customer focus" approach. Once the trust between the administration and tax payer increases, it is bound to increase compliance and collections.
As time is short, to make any radical changes in this year's budget per se, it may be kept as part of the long- term reform initiative with some policy announcements being made now. The popular tax deduction under Section 80C of the income tax act, where an individual could claim deductions up to Rs 1 lakh has not been changed for long.
Over the years, this tax benefit has been cluttered with many conflicting economic priorities that the government wants to promote. To highlight the issue, an individual could invest in a provident fund or pay the premium for his life insurance or incur the expenses on the education of his children, all under one tax benefit. This benefit requires reconsideration to align it with the current macro- economic priorities of the government. For instance, a separate deduction could be allowed specifically for the life insurance term policy to encourage income earning members of the household to buy this insurance cover.
Moreover, this popular deduction of Rs 1 lakh has not kept pace with the rising inflation and hence needs revision. This limit should be enhanced to Rs 3 lakh now and eventually to Rs 5 lakh. At present, the maximum amount not chargeable to tax for individuals is Rs 2 lakh, which is quite low. This limit should be revised to Rs 3 lakh and should be linked with the inflation index, so that it is revised automatically on an annual basis. The highest tax rate of 30 per cent is triggered at an income exceeding Rs 10 lakh. This limit should be increased to Rs 20 lakh. Similarly, the other slab rates should be suitably modified.
Another important tax relief generally availed of by the households is the deduction for interest paid on housing loan for a self- occupied house property up to Rs 1.5 lakh. This deduction has not been revised for long and has not kept pace with the rising cost of construction and housing loans. This should be increased to Rs 3 lakh now and eventually to Rs 5 lakh. There are a few other benefits under the current tax law that have outlived their utility and require a reconsideration such as medical reimbursement to the salaried employees by their employer for reimbursement of expenses up to Rs 15,000 per year and conveyance allowance up to Rs 800 per month.
These limits should either be enhanced substantially like an increase the medical expense reimbursement limit to Rs 50,000 per year and conveyance allowance limit to Rs 3,000 per month or these should be discontinued and instead clubbed in the form of a standard deduction / exemption of Rs 1 lakh per year The New Pension Scheme ( NPS) has not evinced much interest from private sector employees. The key reason is its taxation model especially in comparison with the public provident fund ( PPF). NPS works on exempt, exempt, tax ( EET) model. The income received finally at the retirement age is liable to tax. PPF works on exempt, exempt, exempt ( EEE) model i. e. an individual can claim deduction for the investment made, the interest accrued in the account is not taxed and finally the amount received on maturity or other contingency is generally not taxable. To popularise NPS, the EEE model should be extended to NPS as well.
Post a Comment